UMH Properties, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018. UMH is a REIT operating 112 manufactured-home communities with approximately 20,000 developed sites across eight states. It also leases and sells manufactured homes and invests in securities of other REITs.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Total income | $29.8 million | $26.4 million; up 13% |
| Rental and related income | $27.3 million | $24.5 million; up 11% |
| Community NOI | $14.5 million | $13.0 million; up 11% |
| Net income (loss) | $(22.2) million | $2.3 million |
| Net loss attributable to common shareholders | $(27.2) million; $(0.76) per share | $(1.5) million; $(0.05) per share |
| Operating cash flow | $10.3 million | $11.6 million |
| Core FFO / Normalized FFO attributable to common shareholders | $6.35 million / $6.33 million | $5.06 million / $5.03 million |
The reported quarterly loss primarily reflected a $25.9 million decrease in marketable securities’ fair value, which was recognized in earnings following adoption of a new accounting standard. Excluding that markdown, management-reported Core FFO was $6.35 million. Community NOI is a non-GAAP measure and is not a substitute for net income or cash flow.
Community operating expenses were $12.8 million; the operating expense ratio was 46.8%, unchanged year over year. Manufactured-home sales rose 32% to $2.5 million on 54 homes sold, with a 22% gross profit margin; the sales operation still recorded a $293,000 loss. Depreciation was $7.6 million, up 16%, primarily reflecting acquisitions and additional rental homes. Interest expense declined 12% to $3.6 million.
At March 31, total assets were $813.4 million and total liabilities were $366.8 million. Cash and cash equivalents were $26.0 million; marketable securities were $113.3 million. Cash, cash equivalents and restricted cash totaled $31.9 million. Mortgages payable were $306.7 million before debt issuance costs, at a weighted average rate of 4.2%; loans payable, net, were $50.4 million. The company reported $15 million drawn on its $50 million unsecured facility, $21.6 million outstanding on a margin loan, and approximately $25.2 million of availability on inventory-financing facilities. Net debt to total market capitalization was approximately 29%, or approximately 19% after subtracting securities, as calculated by the company.
Changes versus the prior comparable period
- Same-property occupancy increased 140 basis points, from 81.8% to 83.2%. Same-property NOI increased 5.4% year to date, per management.
- Rental and related income and community NOI increased mainly due to 2017 acquisitions, higher rental rates and occupancy, and growth in rental homes. Community expenses also rose, including due to the harsh winter.
- The rental-home portfolio grew by 165 homes during the quarter. The filing reports approximately 5,800 rental homes overall and 94.7% rental-home occupancy; it separately reports approximately 5,500 occupied rental homes at quarter-end.
- Loans payable, net, fell $34.3 million from year-end, principally due to lower unsecured-line and margin-loan balances. Marketable securities fell $19.6 million, reflecting the fair-value decline partly offset by purchases.
- The company issued 2 million Series D preferred shares in January, receiving approximately $48.2 million net. Common shares outstanding increased during the quarter, including shares issued through the dividend reinvestment plan.
Outlook, risks and unusual items
Management expects to continue pursuing community acquisitions and investing in community improvements and rental homes. It anticipates adding approximately 800 rental homes in 2018, subject to demand and capital availability. Management cited healthy demand for affordable housing and strong rental-home demand, but provided no specific earnings or revenue guidance.
Key risks include competition for acquisitions, maintaining occupancy and rental rates, access to debt and equity financing, interest rates and refinancing, debt-covenant compliance, manufactured-home buyer access to financing, and volatility in the REIT securities portfolio. The company intends to hold its securities long term but had $14.4 million of net unrealized portfolio losses at quarter-end. Its securities investments are generally limited to approximately 20% of undepreciated assets.
Contingencies include agreements to purchase certain repossessed homes from 21st Mortgage. Related loan balances were approximately $3.2 million under the current program and $3.7 million for previously acquired communities; these are contingent exposures, not reported as amounts currently payable. Management stated ordinary-course claims and litigation were not expected to have a material adverse effect. No legal proceedings were listed. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $25.9 million securities fair-value loss is treated consistently when assessing recurring results, and how portfolio values and dividend income evolve.
- Reconcile rental-home counts: approximately 5,800 total homes, approximately 5,500 occupied homes, and 94.7% occupancy as reported in the filing.
- Confirm debt balances, borrowing availability, maturities, interest-rate exposure and compliance with covenants; the interest-rate swaps had expired by quarter-end.
- Assess whether occupancy, rental growth and planned additions of approximately 800 rental homes can be achieved while funding dividends, capital spending and acquisitions.
- Monitor manufactured-home sales margins, buyer financing availability and potential repossession-related purchase obligations.