Listen on Apple Podcast here: https://podcasts.apple.com/us/podcast/interview-with-rhett-trees-of-seneca-capital-partners/id1520681893?i=1000505070340

SHOW NOTES

Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew talks with Rhett Trees. Rhett is the founder, chief executive officer, and chief compliance officer at Seneca Capital Partners. He loves and specializes in niche, non-correlated assets in sectors that are not well-understood, not over-capitalized, and in niches that don’t fit into pretty little packages and traditional institutional asset classes. Rhett is a seasoned veteran in the mobile home park asset class, having been apart of a mobile home park portfolio exit to Blackstone, circa 2019. Rhett was kind enough to share lessons he has learned along the way in the mobile home park business. Today Andrew and Rhett talk about Rhett’s biggest hurdles in the industry, how spirituality has shaped the way he does business, how COVID has affected Seneca’s portfolio, his experience with third party managers, and what his perfect mobile home park looks like.

Prior to starting Seneca, Rhett Trees was an equity partner at Caddis Capital Investments, the sponsor of Trico Fund III. In 2012 he was a principal at The True Life Companies, a company that was known to be one of the premier providers of land and lots to American’s home builders. He graduated from the Kelley School of Business at Indiana University with a double major in Entrepreneurial Management and Marketing. He completed the Real Estate Executive Program at Harvard Business School and finished off his studies abroad at the University of London in England.

***Andrew Keel and Keel Team Real Estate Investments (Keel Team, LLC) do not endorse any interviewee. This interview is for informational purposes only and should not be depended upon for investment purposes. ***

Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,500 lots under management. His team currently manages over 20 manufactured housing communities across ten states – AR, GA, IA, IL, IN, MN, NE, OH, PA and TN. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities.

Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews: https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy Andrew’s team usually moves on location during the first several months of ownership. Find out more about Andrew’s story at AndrewKeel.com.

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Talking Points:

00:21 – Welcome to the Passive Mobile Home Park Investing Podcast

02:35 – Rhett’s story and how he got into manufactured housing

04:50 – Lessons learned from Caddis Capital Investments

08:45 – Advice for people just getting into passive investing

13:50 – The biggest hurdle in Rhett’s journey

19:42 – How COVID has affected their portfolio

28:39 – What does Rhett’s perfect mobile home park look like?

31:00 – Value-prop for Seneca

42:35 – Shapiro and other third party managers

49:48 – Getting a hold of Rhett

51:50 – Conclusion

SUBSCRIBE TO PASSIVE MOBILE HOME PARK INVESTING PODCAST YOUTUBE CHANNEL https://www.youtube.com/channel/UCy9uI3KGQmFgABsr9lUtRTQ

Links & Mentions from This Episode:

Rhett Trees, Phone: 303-888-2826

Rhett Trees, Email: RTrees@senecacp.com

Seneca Capital Partners: https://senecacp.com/

Keel Team’s Official Website: https://www.keelteam.com/

Andrew Keel’s Official Website: https://www.andrewkeel.com/

Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel

Andrew Keel Facebook Page: https://www.facebook.com/PassiveMHPin…

Andrew Keel Instagram Page: https://www.instagram.com/passivemhpi…

Twitter: @MHPinvestors

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TRANSCRIPT

Andrew: Welcome to The Passive Mobile Home Park Investing podcast. This is your host, Andrew Keel. Today, we have an amazing guest, in Mr. Rhett Trees. Rhett is the Founder, CEO, and Chief Compliance Officer at Seneca Capital Partners. Seneca Capital Partners specialize in niche non correlated assets that are generally in sectors that are not well understood, not over capitalized, and do not fit neatly into traditional institutional asset classes. As one of the only registered investment advisors in the manufactured home community sector, Seneca is launching their third fund in four years with a keen focus on deploying another $200 million into the MHC market.

From 2013–2017, Rhett was an Equity Partner at Caddis Capital Investments, the sponsor of Trico Fund III and Equity Vehicle levered to $75 million that sold most of the fund MHC assets to Blackstone in 2019. Rhett, thank you so much for coming on the show.

Rhett: Andrew, it gives me so much pleasure to be here with you. As you know, I consider you to be a dear friend. It’s an honor. The best thing about our industry is the fact that we’re all friends. I don’t know that I have ever been part of a business sector before that has been so welcoming and so familial. We often say everybody that’s a part of Seneca is part of the Seneca family. We mean it—our investors, our service providers, you, people what traditionally call a competitor. That doesn’t resonate with me.

We’re all good people in this industry. We got some great folks that are really adding a lot of integrity to the business which was much needed. We’re just honored to be a part of it.

Andrew: Yeah, I agree. Great to know someone like you and I’m excited to learn about your resume today. Maybe you can start out by just telling the listeners a little about your story and how you got into manufactured housing?

Rhett: Yeah, appreciate that. I’m listening to you saying my bio, it sounds much more impressive than it really is.

Andrew: I don’t know, man. That is impressive.

Rhett: This has all been cobbled together, man. It’s truly on the shoulders of giants. You hear people say that. It’s funny I didn’t even notice until just now. If you see that picture right above me, right there, our fourth generation farm in Indiana. My dad grew up there, my parents still live across the street from that photo. That house is no longer there, it was falling down when I was a kid. Farm house built in the 1800s.

If you look closely in the yard, which I actually used to have in our first presentation on our first fund. There is a 1977 trailer underneath a big tree in the side yard of that house. I spent a considerable amount of time in that trailer. I often say that our conventions, there’s hardly anyone here who’s actually ever lived in one of these things. I’ve got that great distinction of knowing what it’s like to be someone who needs affordable housing. That’s why I’m so passionate about it.

People often ask me, how did you get into this crazy business? It’s truly a lifelong passion. My parents are incredible people with the biggest hearts I’ve ever seen. They were willing and able to help me move to a new school, when I was in highschool to play basketball at a different school. We lived in a barn above a landscaping warehouse for about 2 ½ years. I lived there for two years, they lived there for well longer and then they built a house on our farm. I know affordable housing. I’ve been blessed since then, but that’s the reason why I’m so passionate about this business and about the services we provide to our residents.

Andrew: That’s fantastic. I know you spent some time at Caddis Capital. Looks like you spent about four years there. What did you learn during your time there that you brought over to Seneca Capital Partners?

Rhett: You know, that was a big blessing for me too. I had been in the land business. I was a big land developer before I got into the mobile home park business. I was also in the mobile self storage business, which I loved. Mobile self storage business was incredibly capital intensive and not nearly as passive as I had anticipated when we started. There were six of us, we sold that to waste management the last day of 2009 for nearly $100 million.

I got into the land business after that. I thought I could help bring more affordable housing to the landscape. We were literally buying large tracts of land from the National Home Builders and holding onto them, turning around and reselling those tracts back to the same people we bought them from. During that time, our investors would say to me, I’d love to have a little more return on investment during a traditional IRR. You’re writing 50-year business plans with your land developments. It just doesn’t resonate with people, except for large family offices who have legacy planning and really don’t need the capital, return of, or return on that capital for an extended period of time. It’s more of a return on equity play not an IRR play.

I started thinking to myself, how can we really activate this land? What’s the best covered land play? That’s when I really fell in love with mobile home park investing. Started to say to everyone that would listen, do you know anyone in this business? Because at that time—this is 2010—there weren’t a lot of folks that were really into business, especially sophisticated people. I had said to my banker at that time, we were having lunch and she said, oh, I’ve got the perfect guy for you.

I had lunch with Terry maybe three or four days later. Terry and I became business partners and I’m eternally grateful for his knowledge, his friendship, and what we accomplished together with just the two of us. Terry had been in the business since 1986. He’s in the 70s, I was in my early 40s at the time. We really just knocked it all apart. We had a ton of fun. He’s a fourth generation Colorado rancher. He sees the world in a unique light. I’m a fourth generation Indiana farm boy.

I’d say that we’re both conservative, which I think was helpful. We still built one heck of a portfolio that you’d mention we sold to Blackstone, majority of those assets to Blackstone in 2019. I learned a lot about what to do, what not to do. What we do at Seneca is way more sophisticated now, I’ll tell you that much in regards to how we model, how we look at assets.

In 2011, 2012, 2013, we basically buy any mobile home park asset for an 8 cap or 12 cap. It was really hard to mess up any of those assets. We got really lucky, Freddie Mac came in on the business in the 2012, 2013 time frame. We were one of their biggest borrowers during that time. Thanks to […] who was at GE Capital and is now […], but a long time friend of ours, we did ton of deals with.

Andrew: That’s fantastic. Some big names that you mentioned there with humble beginnings. I love that. This is a question that I ask everyone that I interview. What are the most important things that passive investors need to look out for when investing into mobile home parks? What are the top things, maybe the three things, maybe it’s five things, what would you tell someone that’s completely new, that just heard about it, and now they’re interested in diving in?

Rhett: That’s a tough one. I can tell you, from my experience, as someone who owns their own family office, who invests with a lot of others via passive investments, and someone who’s a sponsor—which I think is a unique perspective in our world. It’s a scary, dangerous place. It’s based on due diligence, on track record, on people running the business who is a real steward, a real fiduciary. That’s the reason why we started Seneca as a registered investment advisor.

I had been raising money in the MHC space from third parties for our previous funds at Caddis. The thing I heard from everyone, man, we’ve been trying to get into this space forever, but there’s no sophisticated sponsor who has given us the check boxes that we’re looking for. It was the registered investment advisor, are you a legal, a true fiduciary for the investor? You put their interest ahead of your own. Can you put a reporting package together on a monthly, quarterly annual basis that is institutional quality that helps us go to our underlying clients and say, look, what we’ve done for you. We’ve put you in this sophisticated vehicle that we can easily know is above board and they’re doing the right thing.

One thing that we heard, especially, was that no one was providing audited financial statements at the time. That was something that was incredibly important to me. We went to KPMG and KPMG had never done a fund of our size. It was a very difficult sales job. I’ll eternally be thankful and grateful to Paul Nocco here in Denver at KPMG because we convinced him like we had convinced our investors.

When we started Seneca, it was with a really simple premise. Do the right thing with the right people for the right reasons. And then we had this aspiration which we were very vocal about, which was to launch five funds in five years and to sell them simultaneously for a billion dollars in the 2026–2028 range. We’ve been going about that very simple goal.

I think if you can outline goals in a very succinct manner for not only your investors, but for your partners and associates that work with you and for those that work with you, in alliance with you, like our service partners. It’s been a very easy thing to do, to say to our service partners, we’re doing these for these reasons and we want to stay inside that construct. We’ve been rewarded for that. I think that’s the hallmark for our success.

As a passive investor, I’ll be honest with you, I know nearly every sponsor in the space and I haven’t found one that can match the criteria for my family office. It’s sad, I have aspirations for that to change. Thanks to people like you and others in our space, I think we’re getting there and I’d be honored to work with all of you because I love this new crop of folks that are coming into our space. It’s been a little bit concerning and very competitive. But I’m grateful for it because we needed a new breed of syndicators and sponsors to come in and really do what they say they were going to do. Folks like you have done that. I’m grateful for you doing that because it helps all of us.

Andrew: I agree and I appreciate you saying that. I’m definitely a small fish compared to what you guys are doing at Seneca. But people are doing it the right way. There’s other operators making the headlines of coming in and raising rents but not improving the assets. That’s just not how we choose to do business. That’s something I look up to you guys because I’ve seen some of the pictures and things on social media that you guys do in your properties. It’s impressive. That’s the same stuff that we do on a smaller scale. Very cool.

I agree, definitely need to make sure that who you’re investing with has the same integrity. That’s very important. Rhett, what has been the biggest hurdle for you in this business?

Rhett: Gosh. I’m so grateful and blessed, Andrew. I got such a lucky start with Terry and Caddis and the ability to jump off from that point. We had a track record with the sale of Trico Fund III that really helped. We’ve had some recent supplemental re-fis that have been super helpful for our investors in regards to returning capital to them showing and proving that our business model from day one was spot on.

We look at every asset in a really unique light. We look at every asset and it has to have the ability to have a supplemental loan, a cash out refinance attached to it. In addition, we’ve done every loan in Seneca’s history with Freddie Mac. They’re a dear partner of ours. We just wouldn’t be who we are today without them. Thankfully, the construct of their refinancing packages is such that everything we’ve done with them is a really low interest rate, it’s got a 10 year term with 30 year amortization and we have 3 supplementals with all of our loans with an assumption clause.

Those two constructs about the supplemental on the assumption are fundamental to our disposition strategy, which is to sell or have a sovereign private equity firm or US based private equity firm assume all of our loans and take over all of our assets in a single charge, four or five funds. We think both of those things are incredibly fundamental to what we do and why we do it.

There’s an underlying factor there too which I think goes to your previous question, which is we don’t do CMBS debt, we don’t do bank debt. I’ve lived in that space before and CMBS, I think you just get out over your tips a little bit when you start to look at CMBS deals. Because it becomes a little more broad, there’s something that gives you a tremendous peace of mind when you know that a government sponsored entity is doing their underwriting in lockstep with you to have your solo servicer in the middle. And to know that yeah, we’ve got this right.

We did what we thought should be done right and the debt agrees with us and we’ve underwritten this correctly. They’ve come back with a similar underwriting. That just gives me a ton of peace of mind. I’ve got a majority of mine that is worth invested in Seneca and our funds too. There’s all these checks and balances.

To your question about the hurdles or what’s been the toughest part. I think scale is just something that we all struggle with in this business. If you get down to the real heart of the matter, you’ve really got to ask yourself, why does the tenant have to pay for this low cap rate environment? I struggle with that, I‘ll be honest with you. I’m a really spiritual cat and we run our business in a really spiritual manner.

That’s been the hardest part about this recent situation in affordable housing and just housing in general in America is. The tenant really does take a lot of this brunt because if you buy something at such a low cap rate, the only way to get yourself out of it is by raising rents or cutting costs. It’s a really simple business. It’s probably the most simple business I’ve ever been a part of. It’s an NOI based business where there’s really two leverages you can pull.

You’ve got to do them simultaneously or else the model just doesn’t work. That’s the struggle, if you can find a seller that’s willing to sell for a win-win price which we struggle with but we close three deals in December alone. If you went back and asked all those sellers if we were fair, if we were kind, if we did the right thing, I know each of them would say yes, because we’ve talked to them after the sale.

To be honest with you, they’re our friends now. I really get engaged in the friendship of the business. That’s what it’s really about for me. It’s not about the money. I could care less about the money. It’s truly about this is our existence. I often tell people, it’s business and my job, it’s not my career. This is my life. I’ve got everything tied up into Seneca. It’s just how we present ourselves to the world more than anything.

Andrew: Definitely, yeah. Back to the hurdle part with the tenants and how they bear the brunt of this, I think that mobile home parks have been deferred a long time. It’s probably been with a lot of the mom and pops 10, 20 years before they’ve done some of the deferred maintenance that’s been necessary. I think it is a double edged sword, like you’re saying. The deferred maintenance and some of the capital improvements that are being made are being made. But as a function of that, lot rents. It’s been studied that they are low across the country. They’re starting to go up. I’m sure now that COVID has happened, some of those have been paused. Maybe you could touch on that briefly, just how COVID has affected your guys’ portfolio.

Rhett: As you and I have talked about, I took a really broad view of COVID originally in the beginning. I knew in my heart of hearts that having been through recessionary periods with this asset class before that it was going to be resilient. It just always is. It’s the last receptor for affordable housing in the country. It’s the last bastion for anyone who needs affordable housing.

I knew that people would flock to this asset class and they did. I give all the grace to Larry Nelson, our head of asset management. He was doing a stress test on our entire portfolio almost on a daily basis in early April through the middle of May range. We were looking at our collections on a daily basis to ensure that we weren’t getting out over our skis, that we were collecting all the rents that are planned, what we called voluntary capital expenditures, were still needed and we’re still on track and we held back some discretionary capital expenditures to see where we were headed and what was going to happen.

It was just a very noisy time in that early March through April time frame. Once we got to May 01 rents and we are 97% collected, I said to myself this is one of those rare opportunities or once in a lifetime opportunity for us to strike in a market that’s been overheated that we know is going to thrive no matter what happens here, even if the pandemic ran for 12 or 24 months that we were still going to be fine. We were flush with capital. We had a fund too that had just closed. It was about a $90 million total AUM fund. We had all that money at our disposal. I jumped in an RV and I was gone—I think we went to 18 states. I looked at 33 deals. I sent an email to every broker and third party I knew in the country and I said send me any deal no matter where it is in your pipeline and I’ll see it in person in the next three weeks.

We did, we looked at 33 deals and we looked at competitive deals. We dove deep into every market. I was in a 32 foot RV doing competitive mobile home park tours with my two kids who were 11 and 8, and my wife who basically had no idea what I did other than hearing me talk on the phone. For them to witness that lifestyle and what daddy does for a living, personally, I think it was maybe one of the biggest gifts I’ve ever given my family. My kids came back with a whole new appreciation for not only our life but just being empathetic for those who need help from us and others.

The fact that what Seneca provides is clean, safe, affordable housing for our tenants. To our previous conversation, one thing that we’re really proud of is if we do raise rents, we provide some type of amenity or benefit to the tenant immediately if not prior to that rent increase. If you look at our community in Dallas, since we bought it, to your point also, have incredible amounts of deferred maintenance that the owner lives nearly three hours away. She hadn’t been there in eight years. They haven’t done anything to the park. We came in and put in a brand new basketball court, a soccer field, a huge gazebo, a Texas style barbecue pit that was 30 feet wide. We’ve had families in that community center that have booked every day of every weekend since we’ve remodeled it.

It gives me so much joy to know that all those people now have this community. That’s what we’re in it for, it’s this community but we forget about that part of what we do that we’re providing a literal community. This structure for people to have these safe places where they can go barbecue with their friends or their family and really be a part of the community. That’s something that we’re really proud of.

Andrew: That’s huge, man. I’ll never forget, it was a German that works with me, his mom is an artist. In one of our parks, there was like a big huge blank wall, when people come into the community. She said, if you fly me up there to see my son, I’ll paint a mural on that wall. I was like, of course. She came up and she painted a beautiful scenic mountain range with a deer, it was absolutely beautiful. I’ll never forget the tenants coming up after that because I lived in a house in the front of the park during that whole process and I’ll never forget the tenants coming up just saying thank you so much. I’ve been driving home from work for 15 years and just hating driving through this community just because it just looked the way it did.

Now, every time I see that mural and it says welcome home up top and it just melted my heart. Something so small like that can have such a huge impact. I love what you guys are doing to increase the value of these communities that have just been—I don’t blame mom and pops. I think they just needed the income so they just weren’t reinvesting into the assets.

Rhett: Yeah, the difficult part is that they lived off that income forever, the mom and pop. If anything, they didn’t reinvest in the community. I think if you put yourselves in the space of the homeowner and a new behemoth organization buys your mobile home community, what’s your biggest fear? Your fear of losing your home or losing the space where your home resides. The first thing we want to do is put all that to rest. A, all we do is own mobile home parks. B, the last thing we want to do is for you to leave.

We want to do everything we can do to keep you to stay. That’s our job. We bought a park knowing that we wanted you to be there. The last thing we want you to do is to leave. I think in the tenants’ minds when you can come in and immediately make some kind of dramatic change, we’ll repave the roads immediately or we’ll add all these huge amenities. More importantly what we’ve been doing with Freddie Mac, which I think has been incredibly powerful for the tenant, is we’ve been putting in a significant amount of escrows into our loan. I’m talking $300,000, $600,000, $1 million for our most recent deal Coeur d’Alene Idaho where we committed $1 million in escrow to capital improvements, which is a huge amount of money.

I think if you’re the tenant and you know, my rent’s probably under market. I think they do know that. They’ve done the competitive calls. They’ve called over to wherever and said, will you guys give me a credit to move over here and they say, yeah we would but we’re full and our amenity package is less than we are now and our rents are higher than where you are now. I think the tenant knows they’re probably getting a pretty good deal here. If the tenant has their home paid off, I’ll argue until the end of time that mobile home parks are the best value on the planet with regards to housing.

We typically look at three competitive sets when we buy something. It’s a three bedroom, single family rental. It’s a three bedroom or two bedroom class C apartment, what the land value and the home value would be on a private piece of land. We look at all those and we say let’s try and be 20%-40% of whatever that number is. If you could do that you’re going to wind up very long. You’re usually in the 40% number, but if you could be in that range in regards to your lot rent compared to those other asset opportunities for the tenant, it’s a great value for both parties.

Andrew: Huge value, I agree. Rhett, this is another question I ask everybody. What does the perfect mobile home park look like in your eyes?

Rhett: I think that’s probably the toughest question on the planet. The thing that immediately comes to mind for me is potential. We’ve looked at I think maybe $3 billion worth of mobile home parks in the last three years, I’d have to look at the number but it’s probably 150 parks, maybe more, 200 maybe. I look at each of them as a potential child, I call them my children because they’re all different. They all have their unique personality, their city water, city sewer, they’ve got this lagoon system. Half a mile away, you can get to the city water, city sewer and we take the risk of doing that.

At the end of the day, if you ask my kids what I do for a living, they’ll tell you that I’m a highly paid creative problem solver. If you can really frame everything you look at in the mobile home park business in that view or with that construct in mind, then you’ll notice that the entire world opens up to you because there’s never been a perfect mobile home park. Our job, when I tell our investors what we do for a living, is we take assets that have been trammeled or that are disenfranchised that have had previous ownership that truly did squeeze every drop from not only the fruit, not only did they cut off the limbs of the tree, they cut down the entire tree.

It’s our job to really just go back and show that tree what its potential is and we invest in it. We make it better. If we can make some money for investors—when I wake up every morning, I have a really simple meditation with myself. What’s my job today? My job is bifurcated. It’s to give money back, a return of and return on to my investors because they’ve given us their hard earned money. For every dollar they give us, my job and my goal is to give them $2 back. Our tenant, I wake up when I think about when I was living in that barn, what would I have wanted? I wanted a landlord that would’ve been your heartfelt, but would have provided you the services to have a clean, safe, community because I think our tenants have the exact same aspiration that you and I do.

It’s to provide a clean, safe place for our kids to grow up and for them to be better than us when they’re of age. That’s what we do. We provide that clean, safe community in hopes that everyone lives there can find their way and their journey to become their best selves. We try to make it a pretty simple process when we do what we do and for the reasons why we do it.

Andrew: That’s fantastic. You’ve kind of touched on this throughout but one of the last questions is what is the value proposition at Seneca Capital Partners and what would you say makes your funds different? I know you have mentioned a few things, but maybe you could summarize it and tie it together here at the end.

Rhett: As an investor, I think about that a lot too, what separates us from all other people that are out there, because there’s a lot of sponsors—our space in our sector is probably the noisiest sector and this happens every time there’s a recessionary environment and does a chase for yield. Multi-family guys come to town, industrial guys start to sniff around. The folks like us that traditionally end up buying whatever assets those people bought three or four years later because they had no idea what they’re doing which is fun. We’re happy for them to overpay for us to get a discounted future.

Patience is rewarded and we’re in this for the long term. I’m not going anywhere. I plan to do this for the rest of my life. What differentiates us I think, truly, if you asked anyone who’s been a part of our journey, they’d tell you that our hallmark is creativity. I can give you example after example where people have walked away from deals or assigned us deals or we’ve got deals off market because people just weren’t able to think creatively about how can I find a win-win solution for the seller and for us and our investors, and then in the future find the highest and best use for this asset regardless of what it is or how it looks today.

We did a park in Florida where we escrowed $600,000, replaced 166 six-pad cement parking pads and we’ve already completed it, it took us about six months to do that. We’re putting in a water pad, a splash pad for the tenants right now. We’ve taken that from what the seller told us was the last bastion for affordable housing in the county of Florida where we are. We changed the thought for not only our management there about for our tenants that we are the cleanest, safest, coolest place to live in a mobile home park community in the area. Not only that, we’re going to invest in it and show you why. We took what I call a sub-institutional asset, it’s 170 pads and turned it into an institutional asset.

The way that we do that, you and I talked about this in the past too, one big difference here for us is the fact we just got 150 like-new road-ready mobile homes sitting two storage yards across the country. When I started doing that it was a huge, huge risk that we took. I honestly was like I think this is the right thing to do, but to have millions of dollars sitting in a storage yard, that’s burning at an 8% preferred return, fallow capital in a depreciating asset, anybody in the structured finance world will go what are you guys doing again?

When you can step back and look at how this business even works which is what I call this lot activation strategy. If you can get an NOI on that home and that lot with an asset that you bought for $0.20 on the dollar. You sell it for its retail price. Even if you make money on the home or the chattel, it’s a win. I’d sell it at cost if I had to. I’m in it for the lot rent because then I get to put the cap rate on that lot rent. I just activated that lot and now I get credit at a compounded rate for all that income. That’s really the reason why we did it and it’s now starting to catch on to all the people that was genius. I’m like, well, it didn’t feel so at the time. It still doesn’t feel that way right now.

Andrew: Maybe you could maybe explain a little bit deeper into that risk that you took because when you told me that, I was just at a loss for words that you took that risk. But now, it speaks to your creativity that you were talking about earlier.

Rhett: Well at that time, the manufacturers of mobile chattel homes, they were rapidly declining. What was the most difficult part of our business was it was impossible to find a used home. If you did find one for sale, it probably wouldn’t move. They’re like anything else, like your house and my house, they settle, and they get comfortable where they are, and they don’t want to go anywhere. You have to remember, there’s two steel beams that run underneath these things with the hitch type welded to that process, that foundational process.

I call them single purpose vehicles. Their purpose is to get where they’re going and they’re never meant to go anywhere again. The mobile aspect of what we do is really a misnomer. I thought, what if we could get these like new homes and we bought them from the federal government in bulk, tens, twenties, hundreds at a time. If we could, what if we just had them and what if we could go buy mobile home parks that were 50% occupied in thriving 24-hour cities.

We look at three things when we buy a mobile home park. Population growth, income growth, and the dislocation, and ELI index. It’s an index provided by HUD. It’s a little map of every chattel in the country. It will tell you how many units are available, how many people need affordable housing, how many units are available for that contingent.

What happens is that cohort is going, man, I would pay anybody nearly anything to have a home right now. I don’t want to live with my mom and dad anymore, live with my brother, who knows what they’re doing. What gives me so much joy about what we’ve done, and I told people this from the beginning, I don’t think they really understood was, I’m so excited to add supply to this business because it’s a demand driven supply constrained market. Just not enough of it.

Nobody’s going to take a risk and say, I’m going to add supply into this thing. Instead of building a class A apartment complex that’s going to rent for $2300 a month to a 26-year-old who has a $72,000 salary in a market that’s over built by 9000 units, I’m going to go to the other end of the spectrum. I’m going to add supply to the most affordable aspect of housing. It resonated so deeply within me that I just knew it couldn’t be wrong. We’ve sold through 80% of those homes now and we’re trying to buy more but I think the secret’s out. I’ve been talking about this for 7-8 years now.

Some people have caught on which is great because at the end of the day, we need a bunch of us, me, you, and everybody else to add supply.

I don’t care who adds the supply, let’s just add it so these people could have a place to live so we can solve homelessness, and we can solve some of the societal issues that literally do keep me up at night. That’s the reason why we started our family foundation, to solve for some of these things that really do keep us up. That’s the main reason why we do what we do. What differentiates us is our ability to add new supply in homes.

Andrew: As you were mentioning that, I thought through about a handful of other interviews that we have on the show talking about the value add components in manufactured housing communities and how infill is the hardest aspect. It’s easy to come in and to raise rents, but to infill requires more labor, more work, more risk, more capital. Kudos to you guys for not being scared of that and for taking the initiative to put those homes to work. You guys really worked hard to make that happen and you took a risk. That’s awesome that it’s paying off for you.

Rhett: I appreciate that my friend. I know you’ve been doing the same. I’m grateful for it, because your work is harder than ours. You’re down in the trenches. The one thing that I’m really grateful for and I have to say this is Mark Kassab and his team over at Shapiro. Without Shapiro, we wouldn’t be who we are today. I’m just not built for that day-to-day management of what we do. The folks in Shapiro have really changed our lives for the better. I think the industry is better. They know what they’re doing. They’ve got their own portfolio of mobile home communities and they’re doing it for others which I think was the reason why we couldn’t get this institutional view of the industry.

It’s like self storage. I always say to anyone that’ll listen that mobile home park investing is self storage in 1988. There were a bunch of these mom and pop developers across the country who took a ton of risk to buy a piece of land, develop it into whatever they wanted it to be, to try and get a brand going that was almost always Orlando self storage or local yokel self storage. To have the institutional backing of public storage and others was huge for the valuation, the compression of the cap rates in that business.

I think we’re seeing that now. I think folks will help bring some institutional views to what we’re doing and why we’re doing it. I think it’s already here, but that’s really what we do on a daily basis. We’re doing the heavy lifting for the institutional owner because they’re lazy. Let’s be honest. Where we sell our portfolio to is going to be a 28-year-old kid on Broad Street, in New York City, in Manhattan, managing it from a spreadsheet.

Andrew: You’re more than likely right on that. Maybe you can share a little bit about Shapiro and other third party management companies. I’ve spoken with Shapiro. I think it works better for your model for them to manage your parks with 150 lots or higher. Maybe you could talk on some of the strengths and weaknesses of their operation.

Rhett: Yeah, I’d love to. To be honest with you, we’ve had a really unique start to our relationship. I remember sitting down with them at the MCC in Chicago. We had just started with them. They didn’t really do what we thought they were going to do in regards to this hand off process for our first asset. I remember that lunch, I’ll never forget it. I mean we were sitting in a pizza place in Chicago. I was pretty rough on him. I’m usually super chill. It’s pretty tough to get me fired up. I said, you know what guys? This is not the partnership that we had in mind. Mark Kassab looked me in the eye at that lunch and said, you know what? We’re not proud of the way that it came off either and we learned from it. Seneca learned from it and we were like, sweet, let’s go do this.

Ever since that day, they’ve never said no. We bought a 5-part portfolio in Wisconsin. The biggest one was in the high 300s pad and the smallest one I think was 17 pads. They took it all and they said, it doesn’t matter, we’ll figure it out. There aren’t very many other folks in our business that would have said, yeah, we’ll take on a 17-pad mobile home park. That’s 40 miles from the nearest anything. That’s why I’m so proud of them.

They built a professional organization that thinks of themselves as best in breed and world class, and they are. You’re right. I’d love to be a mentor to folks that are just getting started in this business. I’d take any phone call from anyone. I have talked to so many people recently, mainly young folks who are in their late twenties, early thirties that want to really get started and do it more from the bootstrapping side of the business.

I think that’s the toughest part, you’ve got about this 500 pad demarcation line where you’ve got to bootstrap to 500 and then you may have enough income, but if you don’t have any outside investors I’d argue and I know that Ian and Ryan would probably argue and that you would argue that you’re likely better off to just own the whole thing and not have these outside investors or these enormous aspirations. Because there is this no man’s land and we were in it about a year ago where you’re big enough to be big and too small to be big. It’s so frustrating because these costs are eating us alive. We’ve got this overlay on the corporate side. We’ve got a fund administrator, and we’ve got KPMG as our auditor.

We have all these third party services that weigh on us. They’re an albatross around our neck that does more of the bootstrapping. They really don’t have that cost center that they have to worry about. I think that’s the fascinating part about the business because the barriers to entry are so low. Anybody can be an owner in our business, I love it. But that’s the conundrum. I often say it’s a scale business because the cost line stays static.

I know you felt this pain, we’ve talked about it. If you can get a 300-pad park and the cost line stays here, man, there’s a lot of money in the middle. If you got a 58-pad park which we’ve got one in Texas that’s just been our crazy child.

Andrew: You don’t sell it?

Rhett: I’d love to sell it to you because you’d figure out what to do with it. Lord knows.

Andrew: It sounds like a base fit for us, but yeah, we’ll talk about that after.

Rhett: Exactly.

Andrew: You’re exactly right, the scale is the tough part. Building that management team is difficult. That’s really good though that you’ve had a great experience with Shapiro. There’s been other people that we’ve spoken with that have had horror stories with third party managers.

Rhett: Those too. When I was at Caddis, I’m grateful and thankful for that time because we tried both as a pilot on purpose. We had an in-house management team that was really small. We’re trying to manage a couple of properties. We had a third party manager. In my experience, if you do it in-house, it’s twice as costly and we were half as efficient. To our point, you’ve got to have the scale for all that to work. At Seneca, we’ve done what we call hybrid. We’ve got Larry Nelson our head of asset management. Larry is just an incredible resource. The guy has a wealth of knowledge.

He is kind of the oversight for Shapiro and all of our onsite property managers and the regional manager. We provide the strategy and the go-to market thinking around what we’d like to accomplish there. Then we worked in long steps within. Larry has a huge call with them every Monday where they go through every single asset. It’s detailed. We use a third party solution app that I think has been kind of mind blowing and game changing for all of us to have these insights and keeping people accountable to what they were supposed to do after the last call.

You’re better than anyone at this, it’s the process of what you do and utilizing as many tools as possible to make that the most efficient time for everyone in the entire chain. I know that’s how you’ve grown your business. I just love watching you grow and be a real shining light for the industry with this podcast, and with the way you do business, and being a friend to everyone. Thanks for that.

Andrew: I really appreciate that, Rhett. That means a lot coming from you. You’re an idol to me in this business so I’m really thankful and grateful that you chose to come on the podcast. If any of our listeners would like to get a hold of you or might be interested in investing with someone at Seneca Capital Partners, how would you like them to get a hold of you?

Rhett: That’s too kind. My cellphone is out there and I’ll give it to everyone right here. I encourage anyone to reach out to me. I’ve had folks that have never even known much about the business. I’ll spend as much time with them as they want. I think just educating anyone about the business and the positives about what we’re doing here. I’m happy to spend time with anyone if I can be of value. They can call me on my cell, it’s the only number I have, 303-888-2826. They can reach me by email at rtrees@senecacp.com.

We have aspirations to launch fund three here. We’re going to do it this month. We’re going to have a cover number somewhere in the $50 million range. I think we’re probably going to double that to the $100 million range of equity for $200 million in AUM ideally is where we’re going to hopefully end up. We’ve had some incredible investors with us along the way and got a grade advisory board. I encourage you to check out our advisory board on our website. The brightest people I’ve ever worked with. I’m incredibly grateful for them and their guidance. If anybody wants to learn more, I’d be happy to tell them about the industry and why we think we’re so long on everything that’s happening.

Andrew: Awesome. Well, thank you again, Rhett. I think there were several golden nuggets in this episode for our listeners. That’s it for today, everybody. Thank you all so much for tuning in.

Rhett: It’s a pleasure. See you, my friend.