UMH Properties, Inc.
Q3 2017 Earnings Call Transcript

Published: 5 Nov 2017

[Operator:]

Good morning, and welcome to the UMH Properties Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. It is now my pleasure to introduce your host, Ms. Nelli Madden, Director of Investor Relations. Thank you, Ms. Madden, you may begin.

[Nelli Madden:]

Thank you very much, operator. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited third quarter supplemental information presentation. This supplemental information presentation, along with the 10-Q, are available on the company's website at umh.reit. I would like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company's third quarter 2017 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements. In addition, during today's call, we will be discussing non-GAAP financial metrics. Reconciliations of these non-GAAP financial metrics to the comparable GAAP financial metrics, as well as explanatory and cautionary language, are included in our earnings release, our supplemental information, and our historical SEC filings. Having said that, I would like to introduce management with us today, Eugene Landy, Chairman; Samuel Landy, President and Chief Executive Officer; and Anna Chew, Vice President and Chief Financial Officer. It is now my pleasure to turn the call over to your UMH's President and Chief Executive Officer, Samuel Landy.

[Samuel Landy:]

Thank you very much, Nelli. Good morning, everyone, and thank you for joining us. We are pleased to report our results for the third quarter ended September 30, 2017. UMH's operating metrics continued to improve, as demonstrated by our same-store NOI, occupancy, and revenue growth. This quarter, we reduced the cost of our perpetual preferred capital by redeeming our 8.25% Series A preferred stock and issuing a new 6.75% Series C preferred stock. This 150-basis point reduction will result in $1.4 million in annual preferred dividend savings going forward. However, our quarterly results were negatively impacted, due to a $3.5 million expense related to the redemption of our high coupon Series A preferred. This expense is a non-cash, non-recurring, one-time charge. Also during the quarter, we were negatively impacted by an additional dividend payment of approximately $800,000. Most importantly, the proceeds of the offering, net of the preferred redemption, have not yet been deployed. We have several acquisitions under contract that are expected to close in the first quarter of 2018. These acquisitions will be a very accretive use of these proceeds. UMH has been positioning itself for an excellent 2018. Our income growth and overall operating metrics remain on target. Rental and related income increased 12%. Sales of manufactured homes increased 26%. Community net operating income increased 9%, and same-property occupancy increased 170 basis points. Normalized FFO was $4.9 million, or $0.14 per diluted share for the current quarter, as compared to $4.5 million, or $0.16 per diluted share for the prior-year period. Normalized FFO decreased 12.5% on a per-share basis, due to the impact of the undeployed new capital. Year-to-date, UMH acquired six communities at a total purchase price of $41 million. The average occupancy of these acquisitions is 64%. We have experienced the challenges associated with building new communities and understand the inherent value of these vacant sites. Our business plan of improving these communities and adding a rental home program to increase occupancy rates should result in long-term value creation. We have demonstrated the effectiveness of this business plan over the past seven years. Although demand for our property type is very strong, we expect to be able to acquire small portfolios in select communities on a one-off basis, to continue our growth strategy. UMH had a quiet quarter on the acquisition front. However, we currently have a robust acquisition pipeline of approximately $80 million and anticipate completing the acquisition of a number of communities in early 2018. The primary driver of our occupancy growth and performance is our rental home program. The demand for our rental homes continues to be strong, demonstrated by our rental home occupancy of 94.2%. This demand is driven by the need for affordable workforce housing in our geographic areas. We are able to provide quality housing at the lowest cost in any given market. An expanding economy, low unemployment, and rising incomes continue to spur household formation. We have been experiencing a fundamental shift in housing dynamics, as more people are choosing to rent instead of to own. The US home ownership rate was at 63.9% in the third quarter of 2017, down from the all-time high of 69.2%, reached in 2004. Over the first three quarters of 2017, we added an additional 690 homes to our rental inventory. At quarter-end, we owned approximately 5,300 rental homes, representing 28% of our total home sites, versus 4,400 rental homes at the end of the prior-year period, representing a 20% increase in rental homes. Occupied rental homes now represent 32% of total occupied sites, as compared to 28.8% of total occupied sites at the end of the prior-year period. Our same-property results have continued to improve, substantially increasing the value of our communities. Following the positive results achieved in our first two quarters, same-property occupancy increased by 271 sites, representing a 170 basis point increase over the prior-year period. Year-over-year, same-property revenue increased 5%. Same-property expenses increased 7.8%, due to real estate tax increases, which occurred in the fourth quarter of 2016. We expect expenses to normalize for the fourth quarter of 2017. Same-property NOI for the quarter increased 3%. For the nine months, same-property revenue increased 6.3%, and same-property expenses increased 3.3%, resulting in a same-property NOI increase of 8.8%. Our strong year-over-year occupancy growth and same-property NOI growth continues to validate our business model. Our communities in the energy-rich Marcellus and Utica Shale regions remain strong. Additional power plants and pipeline projects are being built, which is expanding the customer base and allowing more gas to come online. These developments will spur the continued growth in the local economies in these regions. Home sales are getting stronger and have increased 26% year-over-year, from $2.3 million to $2.8 million. The total number of homes sold increased 45%, as 61 homes were sold during the recent quarter, as compared to 42 homes sold during the prior-year period. Home sales for the nine months increased 22%, from $6.8 million last year, or 132 homes sold, to $8.3 million this year, or 169 homes sold. Demand for housing in the United States remains healthy, supported by improvements in the economy, sustained wage and job growth, and favorable interest rates. New home sales increased 18.9% in September to a seasonally adjusted annual rate of 667,000, the highest level since October 2007. Nationally, conventional home prices have reached new, all-time highs, with a 6.1% annual gain in August. As home prices increase, the affordability gap widens, and the benefits of manufactured housing become clear. Many markets across the United States are experiencing a shortage of affordable housing. Manufactured housing is an essential component in addressing this housing shortage. And now, Anna will provide you with greater detail on our results for the quarter.

[Anna Chew:]

Thank you, Sam. Core funds from operations, or core FFO, was $5.3 million, or $0.15 per diluted share for the third quarter of 2017, compared to $5.3 million, or $0.19 per diluted share for the prior-year period. Normalized FFO, which excludes realized gains on the sale of securities and other non-recurring items, was $4.9 million, or $0.14 per diluted share for the third quarter of 2017, compared to $4.5 million, or $0.16 per diluted share for the prior-year period. Normalized FFO was $15.4 million, or $0.48 per diluted share for the nine months, compared to $13.1 million, or $0.48 per diluted share a year ago. As Sam mentioned, we have not yet fully deployed the additional proceeds from our recent preferred offering, which has temporarily impacted our per-share metrics. Rental and related income for the quarter was $25.9 million, compared to $23.1 million a year ago, representing an increase of 12%, primarily due to community acquisitions, the addition of rental homes, and the growth in occupancy. Community NOI increased by 9% for the quarter from $12.4 million in 2016 to $13.5 million in 2017. Community operating expenses for the quarter were 47.6% of rental and related income, compared to 46.4% for the prior-year period. As with our same-store expenses, there was an increase in real estate taxes, which occurred in the fourth quarter of 2016. For the nine months, our expense ratio was 47.1%, compared to 47.5% for the prior-year period. As we noted in the past, most of the community expenses consist of fixed costs, and therefore, as occupancy rates continue to increase, and as we upgrade and integrate our acquisitions, these expense ratios will continue to improve. Our REIT securities portfolio continued to deliver strong results, growing from $109 million at year-end to $132 million at quarter-end, representing 14% of our growth asset value at quarter-end. Our REIT securities portfolio provides us with additional liquidity, diversification, and additional income. In addition to the $2.1 million in dividend income earned during the quarter, we generated $467,000 in realized gains. For the nine months, we had $5.7 million in dividend income and generated $1.5 million in realized gains. We ended the quarter with an unrealized gain of $12.8 million. As we turn to our capital structure, as of the end of the quarter, it consisted of approximately $354 million in debt, of which $313 million was community-level mortgage debt, at a weighted average interest rate of 4.4%, and $41 million were loans payable at a weighted average interest rate of 2.7%. 90% of our total debt is fixed rate. The weighted average interest rate on our total debt is 4.2%, compared to 4.3% in the prior-year period. At quarter-end, UMH had a total of $239 million in perpetual preferred equity, including the 5,750,000 shares of our 6.75% Series C cumulative redeemable preferred stock issued recently. Our preferred stock, combined with an equity market capitalization of $539 million, and our $354 million in debt, results in a total market capitalization of approximately $1.1 billion at quarter-end, representing a 31% increase year-over-year. From a credit standpoint, we continue to be conservatively capitalized, with our net debt to total market capitalization at 30% and our net debt plus securities to total market capitalization at 18%. Our fixed charge coverage was 1.7x. Our next debt to EBITDA was 6.1x, and our net debt less securities to EBITDA was 3.7x. From a liquidity standpoint, we ended the quarter with $15 million in cash and cash equivalent and $132 million in our securities portfolio, encumbered by $31 million in margin loans. We have no outstanding balance on our $50 million credit facility, which has an additional $75 million potentially available, pursuant to an accordion feature. We also have $34 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. And now, let me turn it over to Gene before we open it up for questions.

[Eugene Landy:]

Thank you, Anna. Over the past seven years, UMH has almost tripled in size, from 6,800 developed home sites to 19,400 developed home sites. We have accumulated an excellent portfolio of manufactured home communities. Our business plan has added substantial value to that portfolio. During this time, we have grown our total market capitalization 6x, from $191 million to $1.1 billion, while decreasing our net debt to total market capitalization from 44% to 30%. We have strengthened our capital structure by utilizing perpetual preferred capital. We have positioned UMH for a strong future. Our mission is to provide quality affordable housing to fill a great need in this country. Our occupancy levels should rise. Our rental rates should also rise to justify the cost of new lots and new homes. The successful execution of our business plan, the strength of our capital structure, and the substantial decrease in our cost of capital will yield benefits for years to come. We look forward to continuing to deliver positive long-term results and building strong shareholder value. We will now be happy to take questions.

[Operator:]

We will now begin question-and-answer session. [Operator Instructions] Our first question comes from Rob Stevenson of Janney. Please go ahead.

[Rob Stevenson:]

Good morning. Sam, can you talk about how much of the $80 million in the acquisition pipeline is currently under contract, and any new markets in there for you guys?

[Samuel Landy:]

Sure, I'm going to let Brett Taft, our Vice President who handles the acquisitions, answer that question.

[Brett Taft:]

Yes, so about $23 million of the pipeline is actually under contract [indiscernible]. Additionally, $57 million should be under contract within the next two to three weeks. As far as any new markets, no. they're located in Pennsylvania, Ohio, and one property in Maryland. Just to elaborate a little bit further, there are about 2,200 sites included in the portfolio, which represents a cost of $36,000 a site and a 6.5% cap rate going in.

[Rob Stevenson:]

Okay, and then, given the preferred raise and then the equity you guys have been raising under the drip in the stock purchase plan, is it likely that it's going to take you guys until mid-2018 in order to get all of the capital fully invested, when you consider, you know, sort of normalized leverage associated with that equity as well? I mean, that's a decent amount of money for you guys to put to work between - you know, over the next couple of quarters, and just trying to figure out, you know, when you guys think about it internally, when the current capital reaches sort of full deployment.

[Eugene Landy:]

Well, if I could answer that. It's Gene Landy, Chairman. We notice in all the REIT industry, the REITs are deleveraging, and when you deleverage and have more cash, it's difficult to increase your earnings per share. It's good news that we've gone over the years down from 44% debt to 30% debt. But at this time, we think we've probably taken it a little too far. So, we would like to leverage up. We're not a REIT that believes in having $75 million, $100 million in bank lines and not using them. So, we have a lot of money available, so your question is twofold. One is, of course we have $30 million, $40 million that we really have to invest because it's costing us money, and then the second part of that is to invest $50 million or more in borrowed funds to increase the earnings. So, we're going ahead with a program to do that. We're going to be aggressive in acquiring parks. Anna has some good news on paying down some high-cost debt, and we will try to get out as much money as possible and increase our earnings overall and our earnings per share.

[Anna Chew:]

We anticipate at least the first tranche of our acquisitions to be closed in the first quarter of 2018. I also have about $8 million to $10 million of higher interest rate debt, approximately 6.5, 6.75 debt, that we will be paying down. And then, as we need additional funds, we can lever up and get additional mortgages for those communities.

[Eugene Landy:]

Let me add one more thing, which we overlooked the main part of our business plan. We are adding as many as 800 rental units a year at $40,000 apiece, so that will take $32 million, and we have a nice pipeline of new homes coming into our parks.

[Rob Stevenson:]

Okay. And then just lastly from me, I think that it sounded like, Sam, that you had said that property taxes were an expense issue this quarter and they hit in the fourth quarter of 2016. And so, if my understanding is correct then, is there still a big property tax hit in the fourth quarter, or was it just basically all here in the third quarter and that you're looking at probably sort of flat to negative expense growth, year-over-year, when we hit the fourth quarter?

[Anna Chew:]

What happened was in 2016, in the fourth quarter, we got hit with additional assessments, as well as additional real estate taxes for our rental homes. And what we - of course, we didn't know about it because they gave us new assessments because of acquisitions. But what we did is we had a big hit in the fourth quarter of 2016, so in 2017, we accrued for those taxes. So, we do not expect that we will have a big hit in the fourth quarter of 2017. It should be back to normalized expenses.

[Rob Stevenson:]

Okay, thanks guys.

[Anna Chew:]

You're welcome.

[Operator:]

Our next question comes from Jim Lykins of D.A. Davidson. Please go ahead.

[Jim Lykins:]

Good morning, everyone. So, for that first tranche of the acquisitions that supposed to close in Q1, is that the $23 million? And also, the $57 million that you anticipate going under contract in the next two or three weeks, any sense for when those acquisitions will close?

[Samuel Landy:]

Yes, assuming all goes well, the second tranche of $57 million should close February or March. There are some loan assumptions involved, which could delay it slightly.

[Anna Chew:]

Right, so it may go into Q2, but we're hoping for the end of Q1.

[Jim Lykins:]

Okay, so next question. You typically have looked at about $30 million to $50 million per year in acquisitions. Here's $80 million on the books already, assuming everything closes. How should we be thinking about the timeline throughout the rest of 2018?

[Eugene Landy:]

It's hard for us to give you an answer. Some of the acquisitions we're making, the sellers have other parks and we're optimistic that if we close these successfully, we'll get a letter of intent for the other parks. So, we try to be conservative and tell people we'll do $25 million or $50 million in acquisitions a year, and we should exceed that. But it's very hard to be specific. We're continuing negotiations and we're trying to be aggressive. The value of parks, by the way, are going up substantially. The prices we successfully negotiated over the last three years allowed us to accumulate a group of parks that are now much more valuable. Now we have to pay a much higher price for the parks. Cap rates have come down, by the way, it's a whole REIT world. Private real estate is going up in value substantially. Cap rates are coming down.

[Jim Lykins:]

Okay, and one last one from me. I know the strategy has been to acquire properties with 50%, 60% occupancy, raise occupancy. Anything you can tell us about the occupancy levels, just kind of in the aggregate, at these properties under contract and what the value add components will be?

[Samuel Landy:]

Yes, so cumulative occupancy levels for our pipeline rate now is about 77%, so there is a value-add component. I would add that these assets are higher in quality, and they really just haven't begun a rental home program, so I would expect less CapEx and less deferred maintenance in some of the acquisitions we've completed in years past.

[Jim Lykins:]

Okay, thanks everyone.

[Eugene Landy:]

Thank you.

[Operator:]

Our next question comes from Craig Kucera of B. Riley FBR. Please go ahead.

[Craig Kucera:]

Hey, good morning guys. Just want to circle back on the last question. As far as the occupancy level, was that for the entire pool of $80 million, or was that just for the $23 million under contract?

[Samuel Landy:]

That's for the entire pool.

[Craig Kucera:]

Okay, great. And looking to capital, you know, you did increase your securities balance, I think by about 20% from second quarter. As you think about sources and uses of capital going forward, does that mean that you're going to unwind some of that incremental security investment and invest in the business, or are you more likely to lever up to fund these acquisitions?

[Eugene Landy:]

We're very happy with the securities portfolio. The dividends have been good. We have overall gains in the portfolio. We think that real estate is becoming cheaper on Wall Street than it is on Main Street, and so we've maintained the portfolio. However, the portfolio was to provide liquidity, and we've been involved in negotiations for relatively large aggregate groups of parks. One case, we tried to buy a group of parks. I think the amount we had to budget was $188 million, so we used the securities portfolio so that we have the liquidity to make a major acquisition if we can. But it's hard to predict this in advance. We're continuing negotiating, and competition is very difficult right now. There are three or four major groups trying to acquire groups of parks, just as we are.

[Craig Kucera:]

Okay, thanks.

[Operator:]

[Operator Instructions] Our next question comes from Michael Boulegeris of Boulegeris Investments. Please go ahead.

[Michael Boulegeris:]

Good morning. Sam or Anna, the 30% debt to total market capitalization, just so I'm correct, that includes your securities portfolio?

[Anna Chew:]

Yes, it does. Without the securities portfolio, the net debt is about 20%.

[Eugene Landy:]

Which I think is getting too low. We're very conservative, but at this point, we think that it's putting a little drag on our growth and earnings to be so low leveraged. So, we will try the best we can to acquire more assets and use more debt in future acquisitions, including using more debt in buying new manufactured homes for rental purposes.

[Michael Boulegeris:]

I understand. It seems that there's been a lot of progress made in home sales. I'm just curious when the last time UMH had 61 in the quarter.

[Samuel Landy:]

Yes, no, home sales are improving, and I think potentially, there's room for increased prices on the home sales, as well as home sale growth. You know, some of the things that can improve, we have expansions that were completed, and first phases of expansions high expenses with low revenue. So, we have the Brookview expansion, Memphis Blues [ph], Lake Sherman, and Port Royal, and all of those are to create sales income and then rental income. But currently, we're still operating at a 47% expense ratio, but that would be even better, but for the fact that these expansions are not full. Additionally, in New Jersey, where we're having very good sales, we're removing old homes a little bit faster, so that even though we have 95% occupancy, revenue in New Jersey is down about 1%, while we remove homes so we can obtain profitable sales, which we expect to happen, and then the revenue will come back up.

[Michael Boulegeris:]

Appreciate that. Anna, you talked about utility cost savings, I think on the last conference call. Can you provide us an update as how that may be impactful for 2018?

[Anna Chew:]

Well, as Sam had mentioned in the past, we were changing out sewer lines on some of our communities, which we've already seen a nice savings to, but we anticipate that that will continue into 2018. Additionally, we are continuing to separately meter our individual homes in locations where we believe that there may be ways of saving money when we separately meter. So, we're looking into those. We hope that we will continue to do so. I mean, it takes time to separately meter things; it takes time to change water meters and to change our sewer pipes, but we will continue to do so.

[Michael Boulegeris:]

And, Sam, in the press release, you talked about positioning UMH for an excellent 2018. Can you break that down some and share with us what an excellent 2018 looks like in terms of the company goals? You know, maybe same-property occupancy, you know, you're benefitting from a more efficient capital structure, so perhaps a range of FFO that the company has a goal for, or other metrics that you choose.

[Samuel Landy:]

Sure, so - go ahead.

[Eugene Landy:]

Well - well, Brett can give us the amount. We go ahead every month on rent and related revenue. What has that been?

[Anna Chew:]

Well, hold on. Sam?

[Samuel Landy:]

Yes, we're going ahead about $70,000 per month on the rent roll. The new preferred stock reducing the rate from the 8.25 to 6.75 is going to save $0.04 per share, so it's going to increase the FFO per share $0.04 right there. Additionally, everything looks like we will go forward again another 800 rental units, which is $6.4 million. I'd add to that, because we have 94% rental occupancy, you know, last year we only raised the lot rents 4%, but we didn't raise the home rents. This year, it looks like possibly we'll be able to raise the entire rents, possibly to 4%. So, you're going to go ahead $6.4 million on the 800 new rental units. You're grossing $104 million per year annualized now, and that has more of a potential to increase 4% instead of 3%. Additionally, you have the acquisitions; you have the sales that are generating new occupancy. The 47% expense ratio we're maintaining today can improve for a number of reasons. You know, for the communities that we acquired that are turn-around communities still do not have 80% occupancy, and they don't become efficient until they hit 80% occupancy. So, today we have 51 communities over 90% occupancy, 26 communities over 88% occupancy, so 77 of our 107 communities are operating efficiently, but 30 communities need to get to 80% occupancy. We're working on that every day, and basically, we have to fill 1,100 sites to bring all of those communities to the 80% occupancy. And then, that 47% expense ratio could fall, and I'm speculating as to what it could fall to, but potentially, it could fall to 40%, and you know, that's 7% more operating income compared to where we are today, which is over $2 million, so that's another significant area for growth.

[Eugene Landy:]

I'd just like to add, I don't like to do one quarter or one year of projections. The strength of the company is that we have close to 20,000 sites. We have 3,500 vacancies. My view of the industry and the housing market and the affordable housing market is that there's no reason over the next four or five years that we shouldn't be absolutely full and have 3,500 more units rented. We see every day that housing prices are going up 6%. The companies that rent housing are raising rents 6%. We see no reason at all over the next four or five years we shouldn't get rent increases of 4% a year. And you put those two factors together, and you find this company can be very profitable.

[Michael Boulegeris:]

And just to follow up, Gene, with you on that, from your historic perspective, is it reasonable to suggest that you feel the replacement cost of the critical mass now of UMH is substantially higher than, let's say, the current market capitalization?

[Eugene Landy:]

It is substantially higher, and my economic rule is that if demand exceeds supply, then prices must rise to attract the new supply, and that prices will rise at least approaching replacement cost. And replacement cost keeps going up. The cost to build lots is probably $70,000 a lot, and the home prices, as you may know, the manufactured housing industry is backlogged now three, four months, and we're convinced that the price and value of the homes will be going up in 2018, 2019. So, we think that there's substantial value in what we own today.

[Michael Boulegeris:]

Well thank you for that commentary and congratulations, Sam, Anna, and Gene, on the company's more efficient capital structure.

[Anna Chew:]

Thank you very much, Mike.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

[Samuel Landy:]

Thank you, operator. I would like to thank the participants on this call for their continued support and interest in our company. As always, Gene, Anna, and I are available for any follow-up questions. We hope to see you at the NAREIT conference later this month, and we look forward to reporting back to you in March with our year-end results.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. The teleconference replay will be available in approximately one hour. To access this replay, please dial US toll-free 1-877-344-7529 or international 1-412-317-0088. The conference ID number is 10111693. Thank you, and please disconnect your lines.