UMH Properties, Inc. — 2016 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2016; quarterly figures are also presented. UMH is a REIT focused on owning and operating manufactured-home communities, with additional rental-home, manufactured-home sales and financing, and REIT securities activities. At year-end it operated 101 communities with approximately 18,000 developed sites across seven states. After year-end, it acquired five communities with approximately 1,300 sites, bringing the portfolio to 106 communities and approximately 19,300 sites.
Key financial results
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Total income | $99.2 million | $81.5 million | Up 22% |
| Rental and related income | $90.7 million | $74.8 million | Up 21% |
| Community NOI | $48.0 million | $37.7 million | Up 27%; non-GAAP measure |
| Operating expense ratio | 47.0% | 49.6% | Improved 260 basis points |
| Net income | $11.5 million | $2.1 million | Increase partly reflects securities gains |
| Net loss attributable to common shareholders | $(2.6) million; $(0.09) per share | $(6.1) million; $(0.24) per share | Preferred dividends exceeded net income in both years |
| Normalized FFO | $18.4 million | $14.2 million | Management reported 20% growth per share; non-GAAP measure |
| Cash from operating activities | $29.4 million | $25.7 million | Up from prior year |
| Cash from investing activities | $(77.6) million | $(148.7) million | Outflows included property, home, and securities investments |
| Cash from financing activities | $45.9 million | $121.4 million | Lower mortgage financing activity than in 2015 |
Quarterly and operating indicators. Fourth-quarter 2016 total income was $25.1 million and net income was $3.4 million; the common-shareholder loss was $0.4 million, or $0.01 per share. Year-end overall site occupancy was 81.0%, up from 79.5%; same-property occupancy rose to 84.8% from 82.9%. The approximately 4,700 rental homes were 91.5% occupied. Manufactured-home sales increased 26% to $8.5 million, but the sales operation still recorded a $1.4 million loss; gross profit margin was 24%.
Balance sheet, debt, and liquidity. At December 31, 2016, total assets were $680.4 million, total liabilities $363.4 million, and shareholders’ equity $317.0 million. Mortgages payable were $296.6 million gross ($293.0 million net of issuance costs); loans payable were $58.4 million gross ($58.3 million net). Mortgage debt had a 4.4% weighted-average rate and 6.9-year weighted-average maturity. Approximately $11.0 million of mortgage debt was variable-rate; a swap fixed the rate on approximately $10.6 million of it. Cash and cash equivalents were $4.2 million. The company also had $108.8 million of marketable REIT securities, against which $22.7 million of margin loans were outstanding at 2.0%; margin loans are due on demand. UMH reported $15 million available on its unsecured credit facility at year-end, with another $15 million potentially available under an accordion feature. The facility matured March 29, 2017 and was being renewed; UMH drew the remaining $15 million in January 2017. Two mortgages totaling approximately $19.7 million were due in 2017.
Material changes versus the prior comparable period
- Income, Community NOI, occupancy, and rental-home count increased, reflecting acquisitions, rent increases, and lease-up activity. Rent increases at most communities were 3%–5% during 2016.
- 2016 same-property Community NOI increased 18.9%, while management reported a 20% increase in Normalized FFO per share, its fourth consecutive year of double-digit growth.
- UMH acquired three communities in 2016 for approximately $7.3 million, adding about 300 sites. It had acquired communities with about 2,800 sites in 2015, generally at relatively low occupancy.
- Preferred dividends increased to $14.1 million from $8.3 million, following the 2015 and 2016 Series B preferred issuances. The common distribution remained $0.72 per share annually; 2016 common distributions were largely characterized as return of capital for tax purposes.
- Marketable securities rose to $108.8 million from $75.0 million. The portfolio generated $6.6 million of dividend income, $2.3 million of realized gains, and $16.7 million of year-end unrealized gains. The securities are marked to market, so value changes may be volatile.
- Mortgage balances increased modestly, while the weighted-average mortgage rate declined to 4.4% from 4.6%. Interest expense nevertheless rose 10% to $15.4 million, primarily due to increased average borrowings.
Outlook, management commentary, risks, and unusual items
- Management intends to pursue acquisitions that exceed its cost of funds and improve occupancy through rental homes and site development. The post-year-end acquisitions were completed for approximately $36.5 million; acquisition sites averaged varying occupancy levels, including some substantially below portfolio occupancy.
- For 2017, UMH estimated purchases of approximately 800 rental homes at a total cost, including setup, of about $32 million, and approximately $8 million of capital improvements, excluding expansions and rental-home purchases. It also had approximately 1,400 additional sites in engineering or construction stages; timing and completion are uncertain.
- Management cited continued demand for affordable rental housing but acknowledged that manufactured-home sales remain constrained by customers’ access to financing, limited wage growth, regulation, and difficulty selling existing homes.
- Principal risks include geographic concentration in seven states; occupancy, rent and local economic sensitivity; acquisition integration and lease-up risk; variable-rate borrowing and refinancing needs; the impending unsecured facility renewal; and dependence on external capital to fund growth and REIT distributions. Rising interest rates could raise borrowing costs and pressure securities values.
- Other risks include competition, rent control at two New Jersey communities, environmental and weather exposure, home-loan defaults and repossessions, and the potential effects of changes to REIT tax rules. A 2011 flood left the Memphis Blues community closed; redevelopment was underway, with a planned 134 sites.
- UMH has agreed in specified arrangements to purchase certain homes repossessed by 21st Mortgage; related underlying loan balances were approximately $5 million and $4 million. The company also disclosed ordinary-course litigation, which management did not expect to have a material adverse effect. No real-estate impairment charge was recorded for 2016.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the unsecured credit facility was renewed on acceptable terms and how the January 2017 draw and acquisitions affect leverage and liquidity.
- Progress in raising occupancy at recently acquired, lower-occupancy communities and the economics of the rental-home expansion plan.
- Whether operating cash flow can sustain common and cumulative preferred distributions alongside planned capital spending and acquisitions.
- The sustainability of reported earnings and FFO growth after separating property operations from realized and unrealized securities gains, depreciation, and preferred dividends.
- Exposure to securities-market declines and margin calls, including the size and risk profile of the REIT portfolio and its related-party MREIC holding.
- Debt maturities, covenant headroom, variable-rate exposure, and any refinancing or repayment of 2017 obligations.