Nationwide the U.S. housing market is making a remarkable comeback. After a stellar year in 2013, demand from homebuyers seems to finally be getting back to pre-recession levels but with the fundamentals to support these trends. In fact, in certain geographic markets, housing prices have surpasses previous all-time highs. Would-be homebuyers are finally wising up to the fact that they're no longer dealing with a stagnant market, and are facing increasing competition for homes.
These market forces are converging into an ideal scenario for SeachCore, Inc. (SRER) , which provides an affordable alternative to the traditional stick-built homes for consumers. Through Wisdom Homes of America, its wholly-owned subsidiary, the company owns and operates retail centers that sell manufactured homes. As with many areas of the housing market, a lot has changed with manufactured homes in just the last several years. The quality has vastly improved while the price points remain just as attractive.
We spoke with Jim Pakulis, CEO of SearchCore to learn more about these economic trends and how the company has strategically positioned itself to expand aggressively by leveraging these tailwinds.
EQ: A lot has happened at SearchCore in 2014. In May, the company made a full transition into the manufactured homes market, operating retail centers through its wholly owned subsidiary Wisdom Homes of America. What are the growth prospects in this industry that was so compelling to you to inspire that move?
Pakulis: There are several compelling reasons why we pivoted out of technology and into developing, owning and operating manufactured home retail centers. First, the manufactured housing industry is very large – and growing. In 2013 there was approximately $3.7 billion new manufactured homes sold and 2014 is trending upwards. Second, the Great Recession created a vacuum of sorts in the industry and resulted in a fairly significant contraction in the number of retailers and manufacturers. Lastly, the average annual household income is not increasing and in fact, statistically declining from where we were a decade ago. Which means the average household can afford a $130,000 house on a half acre of land, but they may be challenged to afford the $500,000 house. Combining those elements, and adding the fact that we retained as senior management veterans of the industry, makes a very compelling reason for us to be in the manufactured home retail space.
EQ: So what are some promising industry trends that stand out to you right now?
Pakulis: The line is truly being blurred between manufactured homes and stick built. There’s a significant increase in the quality and aesthetics of the homes that are being built. Today’s manufactured home features include vaulted ceilings, wrap around porches, rock fireplaces, upgraded appliances. It’s really amazing. And a lot of the manufacturers are either using environmentally friendly material, or simply by default, using significantly less material than stick built since they’re built in an enclosed environment under strict HUD approved guidelines. Another positive trend is home buyer financing. For the first time in history mortgage financing for a manufactured house and land is on par with stick built. The third positive trend is industry growth. Since 2011 the number of new homes sold has increased year over year by roughly 5,000. It continues to trend upwards with plenty room to grow. Lastly, we’re seeing for the first time new socio economic sectors purchasing manufactured homes that have the financial wherewithal to purchase stick built, but choose not to. As a result we’re seeing more affluent people entering the marketplace to purchase a manufactured home. This is in combination to our existing client base.
EQ: Can you tell us about the business model for Wisdom Homes of America and what makes it unique?
Pakulis: Let's start with management. We brought in Brent Nelms, a 30-year veteran of the manufactured home retail sector. Brent has experience in running roughly 30 retail outlets, doing approximately a $100 million annually. He also had a very deep bench of GMs and managers that are chomping at the bit to come in and join Wisdom Homes as we set off on our growth path. The first element of any successful business model is to make sure that you have the management in place and the personnel in place. We believe we do.
Secondly, for the reasons I mentioned earlier and because the market in general is growing again, we believe that there's ample opportunities in key, high-yield target areas throughout the Midwest in which we can establish and grow retail centers. Texas is a great example. The Texas economy is firing on all cylinders for a variety of reasons including being a very business friendly state and significant increases in the energy industry. And Texas sells more manufactured homes than any other stated by a ratio of 3 to 1. So we see a lot of growth in Texas, as well as the surrounding states.
Third, recent reports came out that the annual household income has been basically stagnant, and has actually declined compared to previous milestones. We firmly believe that even though the overall national economy may be improving in some areas, consumers are unable to or not wanting to buy $500,000, $600,000, $700,000 houses as in the past. They’re becoming more comfortable purchasing manufactured homes. Our goal is to capitalize on that potential growth sector.
EQ: The company has laid out a fairly aggressive growth strategy. You currently have three outlets and plan to grow that by an additional 30 over the next four years. Can you tell us about that plan—whether it’s largely organic or by acquisition—and how the company will execute it?
Pakulis: We plan on using an organic growth strategy. It gives us more controlled which provides for more certainty. It’s less expensive and it’s scalable which allows us to comfortably grow into our pre-determined locations. The key is maintaining tight controls on overhead. Brent Nelms has done a great job in the past, and again is providing the organic model works with our existing locations. We’ll continue to look at potential acquisition deals, but our preference is internal growth. Structurally the model is relatively simple. We geo target regions we believe we can sell houses, negotiate a lease, and order model houses. The real key to our success lies in our marketing and management.
EQ: The housing market in the U.S. is making a strong comeback, and in certain regions, prices are already above the peak levels from the previous boom but with fundamentals to support those prices. How does the manufactured homes market benefit from this?
Pakulis: I agree, some regions of the US market are doing very well, however, other regions aren’t. I think the real estate market is somewhat fractured. For example, nationally we’re seeing some of the highest rates of apartment renters in the country. Another words the number of people living in apartments is at one of its all-time highs. And according to the general consensus, you have an all-time high of post graduates moving back in with their family because of the inability to get a job or get a job that pays well. So there’s an example of two groups of folks right there in which a manufactured homes is a perfect fit.
Here’s another way of looking at it. If a consumer is paying $1,300 a month in rent for a two-bedroom, two-bath apartment then they can afford to pay a mortgage, with interest deductions which offset taxes, for the same amount. If so, then they can afford a $120,000 mortgage. In Texas, that’ll get you a 1,800 square foot, three bedroom two bath, on about a half acre of land. In short that same renter could actually be a homeowner and save money.
Another variable that’s favorable to the manufactured housing industry is that as interest rates increase, individuals that are undecided whether to acquire stick-built or manufactured homes are somewhat forced into the manufacturing realm because the stick-built is out of their price points. Ironically, the increase in interest rates helps the industry.
And I think it’s important enough to re-address it again; the line has been blurred between the traditional stick-built house and a manufactured house. All of the different amenities and features are part of what will create, in our opinion, over the next five years a much stronger demand for manufactured houses than we've seen in the recent past.
EQ: On a consumer level, most homebuyers are familiar with the process of purchasing a traditional home. Is the process for buying a manufactured home any different? What are some differences that people need to understand?
Pakulis: It’s not as difficult process. A home buyer comes to our lot and choices one of our existing models, or perhaps one of the 100 different models that our factory supplier produces. Then, they either will have their lot to put their new house on, or we’ll help them find a lot. The home buyer can get a construction loan or a mortgage. Rates and down payments are predicated on qualifying factors, just like a stick built. And as mentioned, financing options are comparable to stick built.
EQ: You mentioned the team you currently have in Brent Nelms and a few other managers. Recently you brought on Joe Abrams as a consultant and he has an impressive track record, founder of MySpace and other things. Can you talk about the team and how that works together?
Pakulis: From a granular day-to-day operations standpoint, Brent is outstanding. And he’s putting together a stellar group of mainly former general managers and salespeople that have worked with him in the past and that have strong experiences in the manufactured home retail home sector.
Joe joined us from a macro standpoint and my belief is that he sees our industry as potentially having several different revenue streams. Our model hits on real estate and on housing. Those are two very large sectors throughout the United States and I think Joe sees the potential of what our industry, and more specifically what Wisdom Homes of America, has to offer as we go forward.
EQ: We discussed the 48-month timeline, but for something a little more intermediate, what are some milestones over the next year or year-and-a-half that investors watching the company should look for?
Pakulis: I would key in on our inventory. The number of properties we have on our lot, and the number of properties we move on a regular basis. I think that metric would be beneficial to anybody looking at our success over the next six, 12 or 18 months.
EQ: Any final takeaways that you want to provide for our readers?
Pakulis: Made in the USA. Bought in the USA. Lived in the USA. It doesn’t get any better than that.
For more information on SearchCore, Inc., visit their website here.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer