Hi {{first_name | there}},
Each Tuesday, I send a short note on commercial real estate to help you be a better investor. Topics may include deal stories, how I'm thinking about risk, lessons I'm learning, and market observations as we oversee our $500MM+ CRE portfolio and serve our 1,100+ investors.
This week, I want to show you why declining revenue and NOI do not always mean a value-add investment is moving backward, and questions investors can ask to get to the story behind the numbers.
The Investment and Operator
About a year ago, Wellings invested $8.75 million in a five-property manufactured home community ("MHC") portfolio in North Carolina. Our seasoned operating partner specializes exclusively in MHCs and owns and operates more than 2,000 lots.
We acquired the portfolio off-market from a mom-and-pop owner whose primary businesses were trash and septic services, not MHCs. The properties were 100% occupied at acquisition and were reasonably maintained; however, lot rents averaged approximately $370/month compared with more than $700/month at nearby MHCs. Deals like this are extremely rare.
The debt is fixed at 4.5% through 2030, and over 16% of common equity sits in a first-loss position before our investment.
The Business Plan
The plan included property improvements, raising below-market lot rents over time, converting park-owned homes (~50% were park-owned at acquisition) into tenant-owned or rent-to-own, and eventually refinancing into Agency debt.
When the park owns a home, it receives home rent but remains responsible for repairs, maintenance, and turn costs. After a sale or a rent-to-own conversion, lot rent and/or RTO payments continue, and the tenant assumes responsibility for repairs and maintenance.
Tenant-owned homes are also generally more attractive to institutional buyers, and Fannie Mae and Freddie Mac financing (typically the most attractive long-term financing available) generally requires at least 65% of the homes to be tenant-owned or covered by qualifying rent-to-own agreements.
The sales and conversions reduce revenue in the short-term but are intended to lower long-term costs, reduce vacancy loss, improve financing options, and broaden the future buyer pool.
The operator originally projected approximately 3-4 conversions and cash home sales per month. Through the first year of ownership, the actual pace has run approximately double the projected pace.*
As of June 30, 2026, tenant-owned and rent-to-own homes increased from 130 at acquisition to 219, leaving only 16 park-owned homes, compared with 65 originally projected after year one.*
Revenue and NOI Declined
On a consistent operating basis, revenue declined 1.5% from Q3 to Q4 2025 and another 12.8% from Q4 2025 to Q1 2026. NOI declined by 19.2%, then by another 5.7%.*
The park-owned homes generated an average monthly rent of approximately $1,321. After a cash sale, lot rent continues, but the higher home rent disappears. After a sale, we receive sales proceeds of $25,000-$45,000, which are recorded below the NOI line.
After a rent-to-own conversion, lot rent begins along with a monthly RTO payment averaging around $582. Recurring revenue declines, but so do future home repair, maintenance, and capital obligations. Preparing a home for sale or conversion costs approximately $3,000-$3,500, which also pressures NOI during the transition.
Why Distributions Did Not Follow NOI
Even though NOI was declining, distributions have been above the original year-one projection of 5% annualized: 5.55% in Q3 2025, 5.37% in Q4 2025, 6.68% in Q1 2026, and 6.21% in Q2 2026.*
Distributions come from total distributable cash/net income, not NOI.
What Q1 and Q2 Results Have Shown
Faster conversions explain part of the pressure on revenue and NOI, but not all of it. Q1 was also affected by elevated repairs, collection losses, and cash-receipt timing.
Q2 2026 revenue increased 3.7% QoQ, while NOI was nearly flat, declining 1.1%. Average DSCR remained healthy at 2.39x, and physical occupancy ended the quarter at 94.9%. One quarter does not settle the question, but revenue may be stabilizing.*
The Lesson for Investors
If a value-add deal's NOI declines, it's not always a concern. In fact, it can mean the deal is ahead of schedule. Here are a few questions you can keep in your back pocket:
True deterioration. How much of the decline came from lower occupancy, weaker collections, or ordinary rising expenses?
Deliberate transition costs. How much revenue was intentionally given up, and what one-time costs were spent to execute the plan? How were one-time costs funded?
Is there really ROI on the value-add plan? Ask them to name it specifically: one-time sale proceeds, higher rents, avoided future repairs, lower capital needs, better financing, or a broader buyer pool. A sponsor who can't name these specifically probably hasn't thought it through either.
A deadline for proof. Ask when the benefits should start showing up, in cash flow, in a refinance, or in a future sale. A reasonable explanation today isn't enough on its own; results still have to prove it out.
If you are an accredited investor and want to see the full quarterly reports for this deal and other deals in our portfolio, click here to schedule a call with us.
All the best,
Ben Kahle
Managing Partner | Wellings Capital | www.wellingscapital.com