UMH Properties, Inc. — Q3 2013 Form 10-Q
Business and period: Self-managed REIT owning and operating manufactured-home communities, leasing sites and homes, selling and financing manufactured homes, and investing in other REIT securities. This unaudited report covers the quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total income | $16.25 million | $12.19 million | $45.78 million | $34.22 million |
| Rental and related income | $13.99 million | $9.84 million | $39.39 million | $27.50 million |
| Net income | $0.80 million | $1.41 million | $6.57 million | $5.17 million |
| Net income (loss) attributable to common shareholders | $(1.09) million | $0.16 million | $0.90 million | $2.31 million |
| Common diluted EPS | $(0.06) | $0.00 | $0.05 | $0.14 |
| Income from community operations | $6.37 million | $4.54 million | $18.90 million | $12.54 million |
| Operating cash flow | — | $3.71 million | $4.71 million | |
| FFO attributable to common shareholders | $1.90 million | $2.10 million | $9.35 million | $7.56 million |
| Core FFO attributable to common shareholders | $1.99 million | $2.58 million | $10.31 million | $8.31 million |
At September 30, 2013, total assets were $391.6 million and total liabilities were $205.2 million. Mortgages payable were $154.0 million and loans payable were $43.1 million, compared with $108.9 million and $10.4 million, respectively, at year-end 2012. Cash was $7.8 million; marketable REIT securities were $54.2 million. The company reported $15.0 million available on its $35 million Bank of Montreal revolving facility and $7.0 million available on home-sales/inventory credit lines. Twenty-five of its 68 communities were unencumbered.
Nine-month investing cash outflow was $92.4 million, principally reflecting $74.8 million of community acquisitions and $20.3 million of property and equipment purchases. Financing cash inflow was $85.5 million. Cash declined $3.25 million from the start of the year. Common dividends paid during the nine months were $9.91 million, including reinvestments; preferred dividends paid were $5.67 million. The common dividend declared for December was $0.18 per share. The Series A preferred stock carries an 8.25% cumulative annual dividend.
Changes and operating drivers
- Q3 rental income rose 42% and nine-month rental income rose 43%, primarily from acquisitions and increased rental-home income. Occupancy increased to 82% from 80% at September 30, 2012; management also cited an increase from 80% at year-end 2012.
- Community operating expenses rose 44% for Q3 and 37% for the nine-month period, mainly from acquisitions and some non-recurring deferred-maintenance costs. Depreciation rose 59% and 62%, respectively, largely due to the enlarged property portfolio.
- Interest expense increased 27% for Q3 and 31% year to date as debt funded acquisitions. Management said the weighted-average mortgage rate fell to 4.4% from 5.1% a year earlier.
- Manufactured-home sales declined year over year. The home-sales operation reported losses of $0.13 million in Q3 and $0.45 million for nine months, narrower than the corresponding prior-year losses. Gross profit percentages improved to 18% and 16%, respectively, from 11% and 9%.
- Q3 common-shareholder results turned to a loss despite positive consolidated net income, primarily because preferred dividends exceeded net income. Nine-month common earnings also declined despite higher consolidated net income. Q3 securities transaction gains were $0.11 million versus $1.21 million a year earlier; the nine-month gain increased to $3.79 million from $3.50 million.
Outlook, risks and unusual items
- Management described the economy as improving, said activity in its communities had increased, and planned to pursue opportunistic acquisitions. It added approximately 200 rental units to existing communities during 2013 and acquired approximately 300 rental units with 2013 acquisitions; rental units were about 15% of occupied sites at quarter-end. Management said it might invest in additional rentals.
- No quantified earnings or FFO guidance was provided. Management believed available funding and internally generated funds would meet obligations over the next several years; results for the interim period are not necessarily indicative of full-year results.
- After quarter-end, UMH acquired one 91-site Pennsylvania community for approximately $1.7 million and five communities in Ohio and New York for $11.8 million, assuming a $7.7 million fixed-rate mortgage. It also had an agreement, subject to satisfactory due diligence, to acquire eight Ohio communities with about 1,000 sites for approximately $25 million, including assumed mortgages of about $18 million; anticipated closing was Q1 2014.
- The REIT securities portfolio had $1.88 million of net unrealized gains at quarter-end, but 21 securities were temporarily impaired, with $0.87 million of unrealized losses. Q3 comprehensive loss attributable to common shareholders was $4.55 million, including market-related unrealized securities losses.
- A purported class action alleges discrimination and consumer-protection violations relating to Memphis Mobile City. The company considers the action without merit, intends to defend it, and reports insurer support. Management said ordinary-course claims and litigation were not expected to have a material adverse effect.
- Key stated risks include occupancy and rent levels, property-market conditions, acquisition execution, debt repayment/refinancing and covenants, access to debt and equity capital, interest rates, home-buyer financing, REIT qualification, and regulatory or tax changes. The company reported no off-balance-sheet arrangements and no material change in risk factors from its prior annual report.
Important facts for investors to verify
- Whether acquisitions translate into sustainable occupancy, rent growth, and cash flow after deferred maintenance and other integration costs.
- Debt and liquidity after the post-quarter acquisitions, including revolver utilization, refinancing exposure, covenant headroom, and the effect of floating-rate borrowings.
- Whether operating cash flow can support the acquisition program and common and preferred distributions; distinguish consolidated net income from earnings available to common shareholders.
- The value, liquidity, and concentration of the REIT securities portfolio, including the impact of market-price changes and the reported temporary impairments.
- Closing and financing terms for the proposed eight-community acquisition, and the status and potential outcome of the Memphis Mobile City litigation.
- Share-count growth and dilution from the dividend reinvestment plan and outstanding stock options.