UMH Properties, Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good morning and welcome to UMH Properties Third Quarter 2016 Earnings Conference Call. All participants will be in a 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 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 provides 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 2016 earnings release and filings with the 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:]

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, 2016. The third quarter of 2016 was another solid quarter for UMH with the 27% increase in our core FFO per share over the prior year period and 7% increase in our normalized FFO per share. These results were driven by 22% increase in rental and related income and in the improvement in our expense ratio from 49.2% in the prior year period to 46.4% in the recent quarter. These improvements in our overall operating performance were driven by the successful execution of our business plan of acquiring communities in strong geographic locations below replacement costs making necessary improvements and growing occupancy and revenue by utilizing our rental home and sales programs. During the third quarter, we acquired two manufactured home communities containing 165 home sites situated and approximately 71 acres for an aggregate cost of approximately $3 million. Our portfolio is now comprised 100 communities with 18,000 developed home sites located throughout seven states. These two communities are part of a five community portfolio all located in Ohio with the total purchase price of approximately $17 million. The portfolio contains a total of 821 home sites situated on approximately 342 acres. The acquisition of the remaining three communities is expected to close before year-end subject to due-diligence and other customary closing conditions. We will continue to focus on acquiring communities with significant upside potential and leverage our expertise to build long-term shareholder value. The primary driver of our occupancy growth and performance is our rental home program. The demand for our rental home continues to be strong demonstrated by a rental home occupancy of 93.5%. This demand is driven by the need for affordable workforce housing in our geographic areas. We are able to provide quality housing at a lowest cost in any given markets. Job growth and the tight labor market are spurring household formations. Multiple demographic and economic factors have combined to fuel unprecedented demand for rental housing. Earlier this year, the U.S. home ownership rate felt to the lowest in more than 50 years as rising prices put buying out of reach for many renters. The share of American's who own their own home was 62.9% in the second quarter of 2016, the lowest since 1965. Over the first three quarters of 2016, we added an additional 715 homes to a rental inventory. At the quarter end we owned approximately 4,400 rental homes representing 25% of our total home sites versus 3,300 rental homes at the end of the prior year period representing a 33% increase in rental home. Occupied rental homes now represent 28.8% of total occupied sites as compared to 23.4% of total occupied sites at the end of the prior year period. Our same property results have continued to improve substantially increase in the value of our communities. Following the positive results achieved in our first two quarters, same property occupancy rose 200 basis points over the prior year period, revenue increased 13.2% while expenses only increased 2.3% resulting in an increase in same property NOI of 23.1% for the third quarter. For the nine months same property NOI increased 20.4%. Our strong year-over-year same property NOI growth continues to validate our business model. Our community in the energy rich Marcellus and Utica Shale regions remains strong. Although, oil and natural gas prices has been falling for over a year now, and new drilling has been curtailed, infrastructure developments in these regions have continued. Ethane cracker plants, including Royal Dutch Shell’s multibillion dollar plan in Monaca, Pennsylvania and a pipeline project which connect production to distribution are in process. This development was a continued growth in a local economies in these regions. Home sales for the quarter decreased 17% year-over-year from $2.7 million to $2.3 million. However the total number of homes sold only decreased by three homes as 42 homes were sold during the recent quarter as compared to 45 homes sold during the prior year period. Home sales for the nine months increased 24% from $5.5 million last year or 101 homes sold to $6.8 million this year or a 132 homes sold. Nationally conventional home prices continue to rise with a 5.3% annual gain in August. As home prices increased, the affordability gap widens and the benefits of manufactured housing becomes clear. 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 $0.19 per diluted share for the third quarter of 2016 compared to $4.1 million or $0.15 per diluted share for the prior year period, representing an increase of 27% on a per share basis. Normalized FFO which excludes realized gains on the sale of securities and other non-recurring items was $4.5 million or $0.16 per diluted share for the third quarter of 2016 compared to $4 million or $0.15 per diluted share for the prior year period representing an increase of 7% on a per share basis. Normalized FFO was $13.1 million or $0.48 per diluted share for the nine months compared to $10.4 million or $0.40 per diluted share a year ago, representing a 20% increase on a per share basis. Rental and related income for the quarter was $23.1 million compared to $19 million a year ago, representing an increase of 22%, primarily due to community acquisitions, the addition of rental homes and the growth and occupancy. Community NOI increased by 29% for the quarter from $9.6 million in 2015 to $12.4 million in 2016. This is the ninth consecutive quarter that we have delivered double-digit year-over-year NOI growth. Community operating expenses for the quarter were 46.4% of rental and related income representing a 280 basis point improvement over the 49.2% expense ratio of the prior year period. For the nine months, our expense ratio was 47.5%, compared to 50.4% for the prior year period. As we noted in the past, most of the community expenses consist of fixed cost and therefore as occupancy rates continues to increase and as we upgrade and integrate acquisitions, these expense ratios will continue to improve. Our lease securities portfolio continue to deliver strong results increasing from $75 million at year-end to $111 million at quarter end. Our portfolio represented 14% of our growth asset value at quarter end. We ended the quarter with an unrealized gains of $21 million representing a $23 million improvement over the nine months period in addition to the $2 million in net realized gains generated year-to-date. As we turn to our capital structure, as of the end of the quarter it consisted of approximately $342 million in debt of which $285 million was community level mortgage debt at a weighted average interest rate of 4.5% and $57 million were loans payable and weighted average interest rate of 3.4%, 85% of our total debt is fixed rate. UMH has also continued to take advantage of today’s attractive interest rate environment. Subsequent to quarter end, we completed the refinancing of our Fairview Manor community. The new $16.3 million Freddie Mac mortgage is at an interest rate of 3.85% with a 10-year maturity and principal repayments based on a 30-year amortization schedule. Proceeds from these mortgages were used to repay an existing 5.785% mortgage and to pay down our inventory financing line. Not only will this new loan save us approximately $350,000 annually on our interest expense, it also demonstrates the increasing value of our communities. At quarter end, UMH had a total of $187 million in perpetual preferred equity, including the 2 million share of our 8% series B cumulative redeemable preferred stock issued in the second quarter. Our preferred stock combined with an equity market capitalization of $337 million and our $342 million in debt results in a total market capitalization of approximately $866 million at quarter end representing a 29% increase year-over-year. From a credit standpoint, our net debt to total market capitalizations was 39%. Our net debt plus securities to total market capitalization was 26%. Our fixed charge coverage was 1.7 times. Our net debt to EBITDA was 6.8 times and our net debt plus securities to EBITDA was 4.6 times. From a liquidity standpoint, we ended the quarter with $4 million in cash and cash equivalents. $111 million in our securities portfolio encumbered by $17 million in margin loans and $15 million available on our credit facility with an additional $15 million potentially available pursuant to an accordion feature. We also had $18 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 Eugene before we open it up for questions.

[Eugene Landy:]

Thank you, Anna. UMH Properties, Inc. is one of the oldest REITs. UMH was founded in 1968, next year there will be a celebration of my 50th year as Chairman of the Board which will be held at the New York Stock Exchange. Over the past 49 years UMH has been a provider of quality affordable workforce housing. UMH has a mission of providing affordable housing for the growing U.S. population. The annual housing demand is estimated at 1.7 million new needed units. This is composed of 1.2 million new family formations a year. Replacement of obsolete homes requires 325,000 new units per year. The second home market requires 175,000 new units a year. The difference between annual demand and annual supply is estimated at 500,000 needed units. There is a shortage of affordable housing and the shortage grows larger each year. The future housing and business prospects for UMH Properties are excellent. The best measure of good corporate governance is to give shareholders the ability to receive cash generated, and then give the shareholder the decision power to either keep the cash or reinvest it in the corporation as the shareholder wishes. Over the past 20 years UMH has paid a total cash distribution of $16 a share. For the first quarter of 2017, I’ll recommend to the Board of Directors for continuation of our current $0.18 a quarter or $0.72 a share annual cash distributions. Later in 2017, we are hopeful that our normalized funds from operations may exceed as dividend. In addition, we are pleased with the positive performance of our REIT securities portfolio. Further, the performance of our manufactured home communities continues to improve increasing the value of our communities. This may create an opportunity to generate further cash when refinancing existing debt. Good corporate governance gives shareholders access to their own money, we intend to maintain that policy. We are looking forward to the ability to increase our distribution in the future. We will now be happy to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. And we do have a question from Michael Boulgaris of Boulgaris Investments.

[Michael Boulgaris:]

I wanted to ask Sam if you could give us an update on Memphis Blues. I understand there's -- in the last conference call, you mentioned big events in September, and if you could share with us how that has progressed. And perhaps you can add any other expansion plans that are ongoing and provide us an update.

[Samuel Landy:]

The infrastructure for Memphis Blues is in and there is a number of houses being setup currently. Business is good in Tennessee and Memphis, so that the electric company has been delayed making the connection. So that’s slowed us down a little bit, but I understand that’s scheduled to occur in the near future and as soon as that’s done, we’ll have the grand opening and be renting the first house in Memphis Blues. So it’s physically all ready to go, we’re delayed a little waiting for the electric company, but there are houses there and we expect a grand opening in the very near future.

[Michael Boulgaris:]

Thank you. And regarding the 8-K filing, and Eugene, your comments on the dividend potential for increase, you mentioned an increase in expectations for normalized FFO. Are there any other markers that maybe we should be attentive to to understand better the Board's thinking for this potential increase in the dividend?

[Eugene Landy:]

Well, it really depends on the continuation of departments we’ve been making. As Anna pointed out, we’ve been going ahead, how many quarters in a row?

[Anna Chew:]

Nine quarters in row.

[Eugene Landy:]

Nine quarters in row and each quarter we take a look at the FFO and it’s continued to increase. We closely monitor the number of rentals we have and the occupancy on the rentals and the things that going very, very well. So we just wanted -- I wanted express some -- the philosophy of the company, we have paid a very liberal cash distribution, it’s a decade. And we intend to maintain that policy and if the occupancy continues to increase and cash flow continues to increase. I certainly as the major shareholder will welcome the opportunity to increase the dividends. But for the next quarter I’m recommending the same dividend that we’ve been currently paying for a number of years.

[Michael Boulgaris:]

Well, thank you for that additional color. Thank you.

[Eugene Landy:]

We are waiting, other more questions?

[Operator:]

Yes, we do have a question from Rick Murray of Midwest Advisors.

[Rick Murray:]

I am trying to reconcile the very strong same community performance which has been trending nicely with the sort of disconnect with the normalized FFO which this quarter was up $0.01 year-over-year, what's causing that disconnect?

[Eugene Landy:]

Anna, you want to answer that?

[Anna Chew:]

Well, we have additional expenses in G&A primarily due to our growth. Right now we have more than double the size of the community, the size of the company over the last 5 years. So we have been growing, we have added departments, we have a marketing department now, and because of that that is growing our same store earnings. But also with the acquisition we are growing it in the future too. We are looking into the future, we are not sitting down and just saying, okay this is great. We are looking into the future and we are looking at other opportunities.

[Samuel Landy:]

Let me point out, we’re still turning communities around and it's pretty important to note that we made these acquisitions during the ultimate workforce downturn and we have 743 vacant sites in Indiana, 491 vacant sites in Ohio, 640 vacant site in Western Pennsylvania. It's extremely likely that those communities will continue to do well, and we will be able to add another 800 rental units next year generating another 6.4 million in rental revenue, additionally we expect to receive our 4% rent increases. So there is every reason to believe we will grow revenue about $10 million and we are coming out at the 36% expense ratio on the new revenue. So if you look too strongly quarter-to-quarter and see just a $0.01 increase in FFO, I don’t think that tells the story. The real story is, look at the value we have added to these communities, look at the potential for the future, look at the fact that sales haven't made money since 2006 and at the current -- currently sales have been impossible and there is a lot of reason to believe that’s going to improve and when that improves we’re more than twice to size we were when we did 16 million in sales and made 2 million. So we are happy with the $0.01 in FFO, but we believe that it's going to be substantially higher and we believe that we are performing as expected which is very well.

[Rick Murray:]

So we should expect that the Company, on a normalized FFO basis, will earn in excess of the dividend next year?

[Anna Chew:]

Yes, absolutely.

[Samuel Landy:]

Yes

[Rick Murray:]

Thank you.

[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.

[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’s conference later this month and we look forward to reporting back to you in March with year-end results.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. The teleconference replay will be available in approximately 1 hour. To access this replay, please dial U.S. toll free 877-344-7529 or international 1-412-317-0088. The conference ID number is 10092124. Thank you and please disconnect your lines.