UMH PROPERTIES, INC. annual report, FY2015

Business context and reporting period

UMH Properties, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015; quarterly figures below are unaudited. The company is a REIT focused on owning and operating manufactured-home communities, leasing sites and homes, and selling and financing manufactured homes through a taxable subsidiary. It also invests in securities of other REITs.

At year-end, UMH operated 98 communities with approximately 17,800 developed sites across seven states. Reported site occupancy was 79.5%, down from 82.3% in 2014, principally because acquired communities had lower occupancy. Same-property occupancy improved to 83.9% from 83.2%.

Financial performance and position

Total income rose 14%, rental income 17%, and Community NOI 24%, mainly reflecting acquisitions, rent increases, improved same-property occupancy, and more rental homes. Community NOI margin was approximately 50.4% of rental income, versus 47.4% in 2014; the operating expense ratio fell to 49.6% from 52.6%. Manufactured-home sales revenue declined 10% to $6.8 million; sales operations continued to report a loss of approximately $1.9 million.

Net income declined by about 49%, while the loss attributable to common shareholders widened. Preferred dividends were $8.3 million in 2015, including accrued Series B dividends, and exceeded net income. The common loss was $(0.24) per share versus $(0.15) in 2014. Fourth-quarter 2015 net income was $174,000 and the common-shareholder loss was $2.4 million, or $(0.10) per share.

Cash from operations was $25.7 million; investing activities used $148.7 million and financing activities provided $121.4 million. Year-end cash was $6.5 million. Total assets were $604.0 million and total liabilities $357.8 million. Mortgages payable were $286.6 million, up from $182.7 million; other loans payable were $58.0 million. Mortgage debt carried a 4.5% weighted-average rate and 7.1-year weighted-average maturity, compared with 4.8% and 5.2 years in 2014. The filing reports $20 million available on the main credit facility, with a further $15 million potentially available under its accordion feature; home-sales and inventory credit lines were substantially or fully drawn.

Marketable REIT securities were valued at $75.0 million, against $15.8 million of margin borrowings at 2.0%. The portfolio had a $2.1 million net unrealized loss at year-end; nine common-stock holdings were reported temporarily impaired, with $7.1 million of unrealized losses on those positions.

Material changes, outlook, and risks

• UMH acquired 10 communities with 2,774 sites for $81.2 million, increasing developed sites 18%. It also added approximately 1,100 net rental homes, bringing the portfolio to about 3,700; rental-home occupancy was 92.9%, up from 91.5%.
• During 2015, the company raised approximately $25 million through its dividend reinvestment and stock purchase plan and net proceeds of approximately $43 million from issuing 1,801,200 Series B preferred shares. Series B carries an 8.0% cumulative dividend; Series A carries an 8.25% cumulative dividend. Common distributions remained $0.72 per share for the year, and the 2015 common distribution was characterized entirely as return of capital for tax purposes.
• Management plans to pursue acquisitions and increase occupancy through home rentals. For 2016, it estimated approximately 700 rental-home purchases costing $28 million and approximately $12 million of capital improvements, excluding expansions and rental-home purchases. It also stated that it expects comparable quarterly common distributions to continue, subject to earnings, capital needs, REIT requirements, financing and other factors; no specific earnings guidance was provided.
• Risks include local-market concentration, occupancy and rent pressure, acquisition integration and financing, rising rates and refinancing needs, reliance on external capital, manufactured-home financing and sales weakness, regulation and rent control, environmental and insurance exposure, and maintaining REIT qualification. The company’s real-estate investments are concentrated in manufactured housing, and its REIT-securities portfolio is exposed to market-price volatility.
• A 2010 flood left Memphis Blues closed; redevelopment was underway, with construction estimated to cost $5.4 million. Related litigation settled in March 2015, and UMH paid $125,000 with no further liability reported. UMH also has agreements to purchase certain repossessed homes financed by 21st Mortgage; disclosed loan balances associated with these arrangements include approximately $4.5 million and $6.0 million.
• After year-end, the main credit facility was extended to March 29, 2017. One mortgage of approximately $8.6 million was due in 2016. Management stated that available cash, operating funds, capital access and financing capacity should meet obligations for the next several years. The auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective controls.

Important facts for investors to verify

• Whether occupancy gains at recently acquired, lower-occupancy communities and the planned rental-home investment translate into sustainable same-property growth and returns.
• How the higher mortgage balance, other borrowings, preferred dividends and future refinancing needs affect cash available for common distributions.
• The performance, liquidity and collateral coverage of the REIT-securities portfolio, including the reported unrealized losses and margin-loan terms.
• The capital and timing required to redevelop Memphis Blues, complete planned improvements, and meet any obligations under repossessed-home purchase arrangements.
• The filing’s reported common-shareholder loss alongside positive non-GAAP FFO measures; FFO, Core FFO and Normalized FFO are supplemental measures and are not substitutes for GAAP earnings or operating cash flow.