UMH Properties, Inc.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Good morning and welcome to UMH Properties First Quarter 2016 Earnings Conference Call. All participants will be in listen-only-mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [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 now 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 first quarter supplemental information presentation. This supplemental information presentation along with our 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 first quarter 2016 earnings release and filings with Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements. 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 UMH's President and Chief Executive Officer, Samuel Landy.

[Samuel Landy:]

Thanks very much, Nelli. Good morning, everyone, and thank you for joining us. We are pleased to report our results for the first quarter ended March 31, 2016. We have made substantial progress on many fronts. Core FFO for the quarter was $0.17 per diluted share representing an increase of 31% year-over-year and 21% over the prior quarter. Following three consecutive years of double-digit normalized FFO per share growth, normalized FFO for the first quarter of 2016 was $0.16 per diluted share, representing an increase of 23% year-over-year and 14% over the prior quarter. Community NOI increased 34% year-over-year. Same property NOI increased 17% year-over-year. Same property occupancy increased 140 basis points year-over-year from 82.1% to 83.5%. UMH has successfully integrating and upgrading our acquisitions which is further resulting in increased income and occupancy. UMH has continued to execute our long term strategic business plan of acquiring and integrating communities in strong geographic areas below replacement cost, upgrading them, getting a rental home program, sales staff and marketing thereby building long term value for our shareholders. We have increased the number of developed home sites by 17% over the prior year period. Over the past six years we have more than doubled our portfolio by acquiring a total of 70 communities containing approximately 11,000 developed home sites. Our portfolio is now comprised of 98 communities with 17,800 developed home sites located throughout seven states. UMH was recently honored with the Manufactured Housing Institute's Land-Lease Community of the Year award for the Northeast/Mid-Atlantic Region. This award was for our Pine Manor Community. This award showcases our dedication to providing quality affordable housing at all of our locations. We are very proud of our high quality portfolio. The success of our business plan is demonstrated by our strong same property results. Over the prior year period, same property occupancy rose 140 basis points and same property revenue increased 12%. This resulted in same property NOI growth of 17%. Competition for well-located communities has also risen which has driven cap rates down to all-time lows and increased property values. As a result, the value of our entire portfolio has increased. We continue to seek acquisitions in our target market including the energy rich Marcellus and Utica Shale regions where we have felt a substantial presence. We are confident that our strategic business plan will continue to provide meaningful revenue growth, increased occupancy and profitability. Although the low energy prices have continued to reduce shale drilling, more affordable energy cost have helped generate more jobs locally, increasing the financial stability on our residents. The economies in the Marcellus and Utica Shale regions continue to grow as gas processing plants and new gas pipeline projects including the cornerstone project in Eastern Ohio move forward. Our communities in these regions continue to experience increased demand. In addition to our growth through acquisitions, we have grown organically. As previously noted, same property NOI increased 17% over the prior year period. With over 3,000 vacant sites in almost 1,300 acres of land available for future development, we have the operational leverage to grow our earnings substantially. We are seeing a strong demand in almost all of our markets. Many communities have waiting list and cash deposits on hand. In order to capitalize on this increased demand, we continue to expand our rental program. We have added an additional 182 rental homes to our communities during the recent quarter, bringing the total to approximately 3,900 rental homes. Occupancy and rental homes continues to be strong and increased 190 basis points from 92.9% at the yearend to 94.8% currently. Occupied rental homes represented approximately 26% of total occupied home sites at quarter end. UMH is developing 800 units of newly occupied rental housing each year. We've built these units by purchasing factory-built home and installing them on vacant lots. Our cost for 800 new rental units fully set up is approximately $32 million. This investment as a minimum of $6.4 million in additional revenue this year. Rental homes are leased and maintained by our existing staff resulting in minor expense increases and have a major positive impact on FFO. Home sales, an integral part of increasing our occupancy and enhancing community values showed meaningful growth increasing 52% with $1.7 million in homes sold this past quarter as compared to $1.1 million in 2015. Overall, industry shipments in February 2016 increased 29% year-over-year, bringing the seasonally adjusted annual rate of shipments to 86,000 homes. Housing demand and alternative housing cost favor our industry. Prices of traditional site-built homes continue to rise twice as fast as inflation. The S&P/Case-Shiller U.S. National Home Price Index recorded a 5.3% annual gain in February. The median price for existing single-family homes is over $220,000. The feasible supply of homes on the market is low. Additionally, the pace of new single-family home construction has not completely recovered from the recession. The need for quality affordable housing has never been more apparent. Because of the efficiencies of factory production, manufactured homes are highly competitive in quality and value, and so a nitch in this housing market. A surprising spread between conventional site-built housing and manufactured housing continues to widen in our markets. We expect to see a significant increase in home sale. Given the positive momentum in sales, as well as the increases in industry shipments, the company is optimistic that we will achieve continued sales growth in 2016. The housing market has remained healthy through the first quarter of 2016 and continues to experience solid overall demand. Housing fundamentals and the demographic picture are very favorable. The unemployment rate is currently just under 5% compared to 10% at the peak of the recession in 2009. The economy continues to improve which is generating job and income growth and new household formations. Given all of these, UMH expect to see continue progress in our 2016 results. And now, Anna, will provide you with greater detail on the results for the first quarter.

[Anna Chew:]

Thank you, Sam. Core funds from operation or core FFO was $4.6 million or $0.17 per diluted share for the first quarter of 2016, compared to $3.2 million or $0.13 per diluted share for the prior year period, representing an increase of 31% on a per share basis. Normalized FFO was $4.4 million or $0.16 per diluted share for the first quarter of 2016, compared to $3.2 million or $0.13 per diluted share in the prior year period, representing an increase of 23% on a per share basis. Normalized FFO excludes securities gains and losses and $125,000 in 2015 for the settlement of the Memphis Mobile City lawsuit. Rental and related income for the quarter increased by 27% from $17.2 million in 2015 to $21.8 million in 2016, this increase was primarily due to the acquisition of ten communities in 2015, the addition of rental units and the growth in occupancy. Community NOI increased by 34% from $8.4 million in 2015 to $11.2 million in 2016. Community operating expenses for the quarter were 48.5% of rental and related income, representing a 270 basis point improvement over the prior year period. As we noted in the past, most of the community expenses consist of fixed cost and therefore as occupancy rates continue to increase and as we upgrade and integrate our integrations, these expense ratios will continue to improve. Our loss from the sales operation, including interest expense decreased from approximately $600,000 in the first quarter of 2015 to $500,000 for the first quarter of 2016. Although sales of manufacture homes increased 52% over the prior year period, they have not yet returned to pre-recession levels. Many of the cost associated with sales such as salaries, advertising and promotion are fixed. As we turn to our balance sheet, as of the end of the quarter, our capital structure consisted of approximately $361 million in debt of which $289 million was community level mortgage debt and $72 million were loans payable. 81% of our total debt is fixed rate. The weighted average interest rate on our total debt is 4.3%, compared to 4.6% in the prior year period. We also had a total of $137 million in perpetual preferred equity at quarter end. Our preferred stock combined with an market capitalization of $269 million and our $361 million in debt results in a total market capitalization of approximately $767 million at quarter end, representing a 25% increase over the prior year period. From a credit stand point, our net debt to total market capitalization was 46%. Our net debt less securities to total market capitalization was 34%. Our fixed charge coverage was 1.7 times. Our net debt to EBITDA was 7.7 times. And our net debt less securities to EBITDA was 5.7 times. From a liquidity stand point, we ended the quarter with $7.9 million in cash and cash equivalents and $20 million available on our credit facility with an additional $15 million potentially available pursuant to an accordion feature. We also had $11.3 million available on our revolving lines of credit for the financing of homes and the purchase of inventory. In addition, we held $91.4 million in marketable REIT securities. The unrealized gains losses on our investment in marketable REIT securities increased from an unrealized loss of $2.1 million as of the beginning of the year to an unrealized gain of $6.5 million as of the end of the quarter, resulting in an increase in value of the securities portfolio for the quarter of $8.5 million. At quarter end, these marketable REIT securities were encumbered by $30.7 million in margin loans at 2% interest. Generally, 50% of the market value of our REIT securities may be borrowed on margin. We intend to limit the securities portfolio to be no more than approximately 15% of our undepreciated assets. To further enhance our liquidity subsequent to quarter end, we completed the sale of 2 million shares of our 8% Series B cumulative redeemable preferred stock in a registered direct placement at a purchase price of $25.50 per share. We raised approximately $49.1 million in net proceeds and intend to use these proceeds for general corporate purposes, which may include purchase of manufactured homes for sale or lease to customers, expansion of our existing communities, additional acquisitions, and possible repayment of indebtness on a short term basis. We are very pleased with the investors' support and execution of this issuance which we believe provides further confirmation of the strength of our business plan. UMH has also continued to take advantage of low long term mortgage rates. Subsequent to quarter end, we obtained two mortgages for a total of $8.3 million. These loans have ten-year maturities and principal repayments based on a 30-year amortization schedule. Interest on these mortgages are the weighted average fixed rate of 4.3%. Proceeds from these mortgages were used to repay an existing mortgage with an average interest rate of 6.7%. And now, let me turn it over to Gene before we open it up for questions.

[Eugene Landy:]

Thank you, Anna. As founder and Chairman of the Board of Directors, I am proud of the substantial progress UMH has made in its long term strategic business plan. UMH's first quarter results is an excellent start to 2016. We have delivered solid performance metrics with double digit growths in core and normalized FFO, rental revenue, home sales and NOI. We have reduced our expense ratio to 48.5%. Same property metrics continue improve with the same property NOI increasing by 17%. We continue to improve our liquidity excessing the capital markets to our recent preferred issuance. The performance of our securities portfolio which enhances our liquidity has been excellent. Our portfolio generated unrealized gain of $232,000 thus far this year in addition to the $1.5 million in dividend income for the quarter. We are very pleased with our current holdings which had $6.5 million in net unrealized gains at quarter end which represents an $8.5 million improvement from the beginning of the year. Housing fundamentals, demographics and the growing economy continues to trend favorably for our industry. With the anticipated continued growth of our per share earnings, management will recommend to the Board of Directors the continuation of our current $0.18 a quarter with $0.72 annual per share cash distribution. We will now be happy to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. And our first question will come from Craig Kucera of Wunderlich.

[Craig Kucera:]

Hey, good morning, guys. Nice pickup in sales from a year ago. I appreciate the color. Can you talk about the traffic you're seeing? Are you seeing any shift in sort of the quality of traffic, more people being qualified or are you just seeing a lot more people?

[Samuel Landy:]

Well, traffic was always good, even last year. The problem was the ability to finance people last year in January and February as the rules changed. The change in the rules put a monkey wrench in everything, January and February of 2015. That's been worked out for a new program. In my opinion, the lenders are becoming more comfortable with the rules. The same things they were afraid to do a year ago and two years ago, they're now not afraid to do. And that helps substantially and that's driving the sales growth. The customers do have become income do have higher down payments, but there was never any shortage of people coming to the door wanting to buy the houses.

[Craig Kucera:]

Got it. I want to talk about your same store numbers which were really strong again. But wanted to dive a little deeper into expense. Your revenue was solid but your expenses were I think about 8% year-over-year after being basically flat all last year. Can you give us some color on the pick up? Were there any new launches or maybe a lift in taxes? Just some color would be great.

[Samuel Landy:]

Acquired communities are going to have increased taxes. Acquired communities have deferred maintenance. But we've always said that it will level out as expenses being 50% of income on communities where we pay the water and sewer and it should fall to as low as 30% if it separately needed water and sewer. On top of that, there's no real history at least for UMH for how well the rental units will do and I believe that they're going to do better in a 50% expense ratio or a 30% expense ratio. New rental units have very few expenses and in my opinion the new rental units for three to five years. After that you'll have some additional maintenance expenses. But even so they're all added revenue to the community and I don't see the expense ratio ever being greater than 50%.

[Craig Kucera:]

Right, I guess I was asking was there anything unique or, simply to the same store as opposed to what was acquired. Was there anything unique or changing in the same store pool expenses?

[Anna Chew:]

There were some in the same store pool. What had happened is when we did some of our acquisition, of course the local real estate taxes increased because of our acquisitions. So there was some of that in those numbers. I don't have the exact dollars though.

[Craig Kucera:]

Okay, that's what I guessed. Would like to talk about, I think in the past you had an amortizing funding cost to the income statements. I didn't know it was that and I didn't see it at this quarter. Is that somewhere else in the income statement?

[Anna Chew:]

Yes, for 2016 there was [ph] that has to be, AFU I should say that had to be utilized and what happened is the amortization and the unamortized piece had to be reclassified. The unamortized financing cost is now netted against the mortgages and the loans. The amortization is now included in the interest expense.

[Craig Kucera:]

Okay, so it's in interest expense. Got it. Okay, and last one for me. Can you talk about your acquisition pipeline, sort of expectations for the year, sort of opposed to the closing of the preferred equity issuance?

[Samuel Landy:]

We just got back from the MHI Conference in Las Vegas and we worked from dawn to evening with meetings, and there are a lot of things pending. They depend on a few variables. We've very optimistic that we will be able to do $25 million to $50 million in acquisitions this year. But they are dependent on the seller's position on the matters. We're hoping that there will be some large portfolios available. But those things take time and we're working diligently to continue our growth.

[Craig Kucera:]

Okay, thank you.

[Operator:]

The next question comes from RC Mankis [ph] of Rushcutter Capital.

[Unidentified Analyst:]

Good morning, everybody. Thank you for taking my call. Just a quick question regarding the sales per unit. I see that you had a nice increase in the number of sales but the sales price per unite dropped about 10%. Maybe you can add a little color into that, and I'll just listen on your answer to that question. Thank you very much.

[Anna Chew:]

Sure. What had happened is that we are having more sales of the [indiscernible] homes and we also have a rent to own program which increased sales this year. I apologize; it's a rent with option to purchase.

[Unidentified Analyst:]

Okay, so these are just -- to be the older homes that were picked up this year in this quarter?

[Anna Chew:]

Even though just a year or two older, but it's a couple of years.

[Samuel Landy:]

Single section lower priced homes as opposed to multi-section homes in the expansions. When multi-section homes in the expansions sell, they'll sell for $80,000 to the highest we ever sold a house for was $220,000. And that part of the business is still slowly coming back but the sale of rental units, sale of used homes, that's stronger.

[Unidentified Analyst:]

So is that the trend you see for the next quarters then?

[Samuel Landy:]

No, I'm not really -- I suspect we're going to build the Brookfield expansion this year, that's going to be 32 lots just outside [ph], in New York, it might not be finished until the next fiscal year ready for sale but that's going to be a very high end market. We see good sales in certain high end markets, clicked in parts of New York, right near Albany, New Jersey, selling high end houses. So there is a lot of reasons to believe sales are going to pick up on the higher, priced higher margin houses right now. It's been more significant in the lower end houses but we are seeing reason to be optimistic about the higher end sales.

[Unidentified Analyst:]

Okay, thank you very much. I appreciate it.

[Operator:]

And the next question comes from Brian Holland of Sidoti.

[Brian Holland:]

Good morning guys and thanks for taking my call. Sorry if I missed it but can you talk about your rental program and the IRR you are able to generate by adding rental homes to existing home sites?

[Samuel Landy:]

I'm very happy to talk about the rental home. It's really important that people understand the history of manufactured housing and manufactured home community. Jim Clayton covered it in his book, First Dream. And we're providing affordable housing to first-time home buyers. The greatest impediment to their buying a house is to financing. Do they have the 10% down and do they quality for the loan. And the loans in place for less 5 or 6 years have made that issue more difficult for the customers than ever. And some communities did it first, they went to rental units and they added down to rental units and they obtained lender acceptance and Wall Street acceptance of the program which was extremely important to us. Now Freddie Mac accepts rental units in the community, now our investors accept rental units in community, and the customer has always wanted the rental units, it reduces -- they used to need 10% down to buy a house, now they need one month rent and one month security. It great increases the number of people who can potentially occupy a manufactured home in these community. And so that rate increase in demand that we can satisfy results in additional revenue for UMH. And again, new rental units have very few expenses, there is the property taxes, plus our existing management staff that managed the community is now going to manage the rental unit. The cumulative improvements in the houses over the 40 or 50 years that manufacturers have been building them results in a house that's easily going to last 40 years. And so we're paying $40,000 for a thousand square foot, three bedroom two bed house with a 25 year roof and final siding, and it's a great house that people want. It's as good as any apartment because we're in it for only $40,000 we can price our monthly rent below any competitors rent, whether it's an apartment building or conventional single family home for rent, our price for brand new three bedroom, two bed house is always lower than any competition in town which means that even if the population in the town is not growing, people will move from their existing apartments into our housing units. Therefore we have waiting list, it's three to five communities out of our 98 that don't have a strong, strong demand for rental unit. Most of them have very strong demand with waiting list and so we add these homes, each house, each $40,000 investment is growth is $8,000 in a year's rent and it adds up to quite a bit of additional FFO per share.

[Eugene Landy:]

May I just add to this because this is a basic economics of the rental program with investing $40,000 we're grossing $8,000 which is 20%, we allow some 25% of that expenses we hope another 15% on the investment, half of that is attributable to the rent and the side that's vacant but we are buying MH communities with 30%, 35% vacancies and we're buying them based on cap rate so we don't get the empty sites for nothing but we practically get them for nothing and if our business plan works we put in rally and that's into the vacant site and increase the rental income from the park. We do things like issuing $15 million with an 8% preferred which then allows us to go out and invest in the 800 rental units, $32 million. We put them into the products, we fill the vacancies, we increase the conventional rent on the products because we allocate half of that rent to the sites. And then the major thing that has happened is the Freddie Mac has been very good and providing financing for our communities. So if we increase the occupancy, we can go to Freddie Mac and we're getting mortgages between 4% and 4.25%. And so if the program works and the rental unit is successful, at some period we refinance the product and we get back to $40 million or $32 million we put in into the various products and we have another $32 million to complete the cycle and do another 800 rentals in 2017 and 2018. And to date, that program is working very well and you're beginning to see the numbers quarter-by-quarter.

[Brian Holland:]

Yes, thank you for that color. Just a second question if I may. In your overall property portfolio, are you seeing pockets of strength and pockets of weakness in geography and what are driving those?

[Eugene Landy:]

Let me say we have 98 products and relative 94 when I had. So some went ahead but more than others but we are seeing progress throughout the company as the rental income is going up, we're keeping the expenses $0.50 or below. So product-by-product numbers are improving and of course as they improve enough then we can refinance the products and generate capital to continue with the rental program.

[Samuel Landy:]

And just to add, the only weak markets -- New York State, western and central New York State are weak in comparison to everything else. Indiana, incredibly strong; Michigan stronger than we expected when we purchased it but that's not really strong; New Jersey is very strong; Eastern New York is very strong; Ohio is strong everywhere; Eastern Pennsylvania is strong everywhere; Western Pennsylvania is strong; and Tennessee has been fantastic for us.

[Brian Holland:]

All right. Thank you.

[Operator:]

And the next question will come from Robert Henderson of Rudbeca [ph] Capital Management.

[Unidentified Analyst:]

Good morning. Could you give us a little more background on the agreement you announced in the 10-Q of Triad, and potentially some idea of how big that program could be and how big is the potential purchase loan program from Triad to be on your balance sheet at some point in the future?

[Samuel Landy:]

Sure. In 1999 loans were securitized by Wall Street. The loans on houses. That stopped in 2001 and there was no financing available so UMH created our own financing program and probably originated more than $30 million in loans than because we haven't been able to originate loans over the last five years, those loans have been paid down to about $19 million through the amortization of people selling homes and paying us off. We have considerable experience managing loans in our community, we realized a long time ago that we can manage loans in our community better than any outside lender can because our onsite manager, our onsite maintenance staff sees the collateral every day, if there is a default, we can immediately take possession of the house, renovate it and resell it. We know that we're better at managing the collateral than any outside lender. So we found the program with Triad that's at Florida and does a tremendous job where they do the approval process because the approval process is a major legal and regulatory headache and we need somebody bigger than ourselves to vouch for the facts we're complying. So they handle the approval process and we fund the loan. So and this is working fantastically, we're proving deals rapidly all by ourselves, people are happy with this working very nicely. So the next question is how big can it be? And in 2006 we sold $16 million in sales and probably financed half, $8 million. We were half our size so if we're lucky enough, that home sales truly pic up, you could predict that maybe we could do $32 million in sales and maybe we have to fund $16 million in loans. We're far from there yet, we're only in the $8 million to $10 million range for sales for 2016 at this moment but hopefully that will improve. But you could foresee us, our objective is to double the sales from the $16 million to $32 million, and assume we're financing half of that.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

Next, we have a question from Mike Stein of Wells Fargo.

[Mike Stein:]

Do you find or have you looked at -- in your rental program, an eventual purchase opportunity for the renters?

[Samuel Landy:]

I have a difference of opinion with that -- with every other company. In my opinion we're spending $40,000 on the house and it's going to last for 40 years and we're going to collect $8,000 a year for 40 years, $320,000 on a $40,000 investment and by the way that's in present value money because the rents are going to rise each year. So I know that other people talk about the need to sell rental units and they think is all rentals in a good thing but Freddie Mac has told UMH that we're one of their premier borrowers because they are so impressed with the job we're doing, turning around communities and adding these rental units. And as long as we're able to finance communities and even the rental units with these terrific low rates, I personally see no need to sell the rental units even though I know it's more easier to sell the rental units than any other house because the customer likes the lower priced house.

[Mike Stein:]

In general, would you convert those properties to more of that rental programs and traditional selling them?

[Samuel Landy:]

Yes, here is what I think we're doing every day. When we look at communities to acquire, the prior owners in general didn't have the money available for the capital improvement, deferred maintenance or to add rental units. So we look at communities that were first class communities in the 1970s; they had club houses, they had swimming pools, they had curved streets lights, skywalks, truly nice communities; but they are deferred -- maintenance deferred capital improvement and for about 10 year period nobody has been adding new homes when the old homes were becoming 40 years older and older. So UMH looked at this and says all we have to do -- we're -- in some communities we're adding club houses, we're repaving the streets, we're replacing order line, we're putting the club houses, the state-of-the-art club houses like they were in the 1970s, fixing swimming pools when they had that didn't fix it. And then adding the rental units, and the customers' acceptance of this and by the way, we're adding significant marketing. And the customers' acceptance of this generates a waiting list. We are priced from $670 per month for 1,000 square feet three-bedroom, two bath. And with that pricing, we have the managers set up five homes at a time, and they will have three or four of them rented before they are even set up and then we're ordering the next four or five.

[Eugene Landy:]

The reason the government likes us and the Freddie Mac program is doing so well is that we do provide affordable housing, we know of no other program that can provide three bedrooms and two baths for $800 a month on an investment of $40,000. It is a tremendous program for us and it is a tremendous program for Freddie Mac, because the loans are safe and secure, there is no better property class than the manufactured home communities. It is one of the safest communities to lend into, and it is very good because we're providing the needed affordable housing and the government can see that the program is working.

[Mike Stein:]

Thank you.

[Operator:]

And the next question will come from Michael Boulgaris of Boulgaris Investments.

[Michael Boulgaris:]

Good morning. Thank you for taking my questions and congratulations on the progress on all fronts.

[Samuel Landy:]

Thank you.

[Michael Boulgaris:]

Driving down the expense ratio down to 48.5%, do you see this leveling out in the balance of the year, or do you see any additional improvement on that front?

[Anna Chew:]

I think it can still be improved as we continue to add additional rental units, as Sam had mentioned before, those rental unit have less expenses than an average home site. What will happen is, as we add the rental units, income will come up and therefore the expense ratio should decrease. Also as we generate -- as we integrate our acquisitions a little bit more, we believe that there will be additional savings there too.

[Michael Boulgaris:]

Sam, maybe can give us some historical perspective, but 41 homes sold in the quarter, do you think this number can move up into the 50 to 60 range in the near intermediate-term?

[Samuel Landy:]

Absolutely. It is a big improvement on the approval ratio, and as our managers earn sales commissions they only want to sell more. The hard part is getting them to close those first couple of deals. Once they close the first couple deals, success breeds success and they become aggressive salespeople and they want more inventory and things just improve from there. We have more communities than ever contributing to our sales. We have communities that have 100% occupancy that have expansions coming online this year which will also generate additional sales.

[Michael Boulgaris:]

And can you update us as to the relationship with 21st Mortgage?

[Samuel Landy:]

We worked with 21st Mortgage, we like 21st Mortgage a lot. They have a lot of great programs but unfortunately for us, our approval ratio when we were doing the loans through 21st, they would originate the loan, they would use their money and we would guarantee it, but the approval ratio just was not high enough for us and we weren't going fast enough. We went to Triad and that has worked fantastically.

[Michael Boulgaris:]

And in terms of geographic expansion you mentioned Tennessee; do you see further expansion opportunities in Tennessee, or in any other regions where you may want to broaden out your critical mass on a regional basis?

[Samuel Landy:]

Our expansions approval process is pending throughout Nashville. First of all Memphis Mobile City is being rebuilt as Memphis Blues, and that is going to open in the next month, and that is approximately 150 sites. But then the communities just north of Nashville have expansions pending approval, but one south of Nashville called Countryside Village is a 380 space community, and we're working on approvals to add an additional 380 spaces, so this will be a 760 space community just south of the, was originally the Saturn plant but has reopened as a new auto plant. And then the other important thing about that area, because an auto manufacturer is there with a major manufacturing plant, the hospital in town is one of the best hospitals in the state. That is going to generate additional employment and additional growth, and we bought this community at I think 64% occupancy. It's in the 90% area now, which is why we're working on the expansion. It has a clubhouse, swimming pool, beautiful streets, beautiful houses and we see it being a fully occupied 760 space community about 5 to 10 years from now.

[Michael Boulgaris:]

So you see, for example like in 2014 it looks like you acquired a swath of communities in Utica and northern Ohio. You continue to invest in the amenities of your communities?

[Samuel Landy:]

We're adding new clubhouses in approximately 8 communities this year. That is the business plan. UMH, in 2006, when we had 90% plus occupancy and we were trying to expand by buying land, getting the approvals and building communities, because that can be the most profitable, when you sell a house you pay for the cost to construct the lot and then you collect the lot rent forever. If you are able to build a community and sell houses, that is the most profitable. But when we searched the Northeast for land zoned to allow manufactured home communities, the only thing we could find was the project 18 miles south of Albany which was land zoned to allow manufactured home community. It has been 10 years; we have not obtained the final approvals to build it. That is how hard it is. So UMH recognized that when these other people are selling communities with vacancies, there is nothing to us more valuable than those vacant sites. I hear people say that UMH is 80% occupancy and 20% vacancies in negative. Not to us at all. We are buying the 80% occupancy at a seven cap. That is fantastic. We're getting the 20% vacancy virtually for nothing. It is 3,700 vacant sites that we can add 3,700 rentals to and generate 8,000 times 3,000 in additional revenue, $24 million which we expect to net at least half of that, all on the same size company. In addition to that, we own 1,100 vacant acres of land to expand, some of those expansions, take New Jersey, where we own 110 vacant acres. Those will be lots with homes for sale for well over $100,000, hopefully earning $30,000 per unit sales profit, the Coxsakie project, I'm hoping to earn more than $50,000 in unit sales project, Saratoga, New York, I'm hoping to earn $50,000 a year sales profit. So we have a lot of really good expansions and great markets pending, but doing the expansions, expansions has always been an incredibly hard thing to do where you make a lot of money, but buying these communities with deferred maintenance, adding rental units, is the easiest thing I have ever done and we are really enjoying it.

[Michael Boulgaris:]

We note your qualitative growth, and again congratulations. My final question, if I could address, ask the Chairman, I guess in two years UMH will celebrate its 50th anniversary, and if we were to fast-forward two years from now, Gene, what might be your vision as you look down the road for UMH that has really navigated some strategic shifts in thinking about rental ownership and homeownership, but from your perspective might you share your vision with us.

[Eugene Landy:]

The first thing is that if you take the long-term view, there is always been a shortage of affordable housing. The builders are building on the high end, they are not building on the low-end, and the workforce housing, the people who are at the lower end of the income stream cannot get the housing and the shortage is going to grow. We're not building enough housing overall, and we're certainly not building enough housing that the working class people can buy. And historically, that has meant that the manufactured housing industry was 100% fail. The people who build manufactured homes, the factories, the Claytons of the world, they will eventually need sites, and sites will be in short supply and the business that UMH is in is owning the sites. The only problem UMH has today is that we have 17,800 sites and we have got 3,000 vacancies. And when we fill those 3,000 vacancies and our income goes up $15 million on the gross end and probably $10 million on the net end, the only problem is we have to fill those vacancies. And we're doing it with the rental program, but the tide is in our favor. Whether or not you have a rental program there will be a shortage of homes, the apartment rents are going up 5% a year, home prices are going up 6% a year, over three or four years that adds up to a great percentage increase and gives us a better competitive position in the market. So I am convinced that UMH will be 100% full and it will be a very successful company. I am puzzled at the present time by these negative interest rates and by the difference between the cap rates on property and the cap rates in real estate investment trusts. Cap rates continue to decline from historically, there were an average of 8%, when you bought properties you got an 8% return. Today you are down to 5% or 6% returns on property, yet you can get much higher returns on REIT shares, and so we have been very bullish on REITS in general. And we're particularly bullish of course on UMH, but by bullish position it buys to all REITS now. They're still in a cycle in which their REITS are selling at a discount from asset value, certainly discount from asset value based on property values. I think the next two or three years, and by the way I am preparing the company, I told the company we're going to celebrate my 50th anniversary, but I would like them to celebrate a year or two early so I am certain to be around for it, and the company is preparing some public relations in connection with my 50 years in the REIT industry.

[Operator:]

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

[Eugene Landy:]

Before Sam answers, there was no questions on the REIT securities portfolio, and I have to tell you that our REIT securities portfolio is doing extremely well and the gains on the portfolio as of today are over $10.5 million, the returns on our investments have gone up by another $1.5 million over last year's returns. So between dividend, income and appreciation we're making about 18% on capital, and we think that is a very successful allocation of capital for the company, and of course it has increased our liquidity tremendously. It is nice to sit there with $100 million in marketable securities, gives us a lot of confidence in our financial strength. With that I will turn it back to Sam.

[Samuel Landy:]

Thank you, operator. I'd 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 NAREIT's REIT Week event in June, and we look forward to reporting back to you after our second quarter. Thank you.

[Operator:]

The conference is 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 10083025. Thank you, and please disconnect your lines at this time.