UMH Properties, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. UMH is a REIT operating 122 manufactured-home communities with approximately 23,000 developed homesites across eight states; it also rents, sells and finances manufactured homes and invests in other REIT securities.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total income | $37.3 million | $33.4 million | $108.8 million | $95.3 million |
| Net income (loss) | $12.4 million | $(6.3) million | $24.2 million | $(8.5) million |
| Net income (loss) attributable to common shareholders | $5.6 million | $(11.5) million | $6.0 million | $(23.7) million |
| Basic/diluted earnings (loss) per common share | $0.14 | $(0.31) | $0.15 | $(0.65) |
| Community NOI (non-GAAP) | $17.2 million | $15.4 million | $49.1 million | $45.5 million |
| Operating cash flow | Not presented quarterly | $25.9 million | $24.7 million |
- Revenue and operations: Total income increased 12% for the quarter and 14% year to date, driven principally by acquisitions, rental-rate increases, higher occupancy and added rental homes. Rental and related income rose 15% in Q3 and 13% year to date. Same-property occupancy reached 84.0%, up 170 basis points year over year; same-property NOI increased 6% in Q3.
- Profitability and margins: Community NOI increased 11% in Q3 and 8% year to date. The operating expense ratio, excluding non-recurring costs, worsened to 47.5% for Q3 from 46.3%, and to 47.8% year to date from 46.0%. Manufactured-home sales gross margin was 25% for Q3 versus 26%, and 27% year to date versus 24%; sales operations recorded losses of $0.3 million in Q3 and $0.2 million year to date.
- REIT operating measures: FFO attributable to common shareholders was $5.8 million in Q3 versus $7.1 million, and $17.6 million year to date versus $19.6 million. Normalized FFO was $6.0 million versus $7.1 million in Q3 and $18.1 million versus $20.1 million year to date. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
- Cash flow and investment: Year-to-date investing cash outflow was $99.6 million, principally reflecting property acquisitions, capital investment and land development; financing provided $79.1 million. Cash, cash equivalents and restricted cash totaled $18.2 million at September 30, 2019, including $11.1 million of unrestricted cash.
- Balance sheet and liquidity: Total assets were $1.010 billion, total liabilities $473.5 million and shareholders’ equity $536.6 million. Mortgages, net of issuance costs, were $375.5 million; loans payable, net, were $76.5 million. Management reported net debt to total market capitalization of approximately 31%, or 23% after subtracting securities. The company had $116.4 million of marketable securities, $70 million available on its $75 million unsecured facility, and approximately $18.3 million available on home-related revolving facilities. It reported no mortgages due within 12 months.
Material changes and notable items
- UMH acquired four communities with 1,495 homesites for approximately $56.2 million during the first nine months; acquisition occupancy averaged 63%. Property and equipment increased 11% from year-end 2018.
- The company issued 4 million Series C preferred shares in April, raising approximately $96.7 million net. Common shares outstanding rose from 38.3 million at December 31, 2018 to 40.8 million at September 30, 2019, in part through the dividend reinvestment plan. The DRIP cash-purchase waiver was discontinued, which management said would reduce capital raised through the plan.
- Reported earnings benefited materially from changes in the fair value of REIT securities: Q3 included a $9.2 million gain versus a $10.5 million loss in Q3 2018; year-to-date included a $15.5 million gain versus a $19.8 million loss. Despite the 2019 gains, the portfolio had $24.7 million in net unrealized losses at quarter-end. Dividend income declined 31% in Q3 and 25% year to date.
- Mortgage debt rose during the period, while loans payable declined. New fixed-rate financings included $38.8 million at 3.41% and $6.1 million at 3.37%; the weighted average mortgage rate was 4.2% at quarter-end. The margin loan balance was $40.6 million at 2.5%. No interest-rate swaps were in effect at quarter-end.
Outlook, risks and contingencies
- Management planned to continue acquisitions and investment in community improvements and rental homes, seeking acquisitions expected to yield more than the cost of funds. It anticipated adding approximately 800 rental homes in 2019, excluding homes acquired with communities. No formal earnings or revenue guidance was provided.
- Management cited healthy demand for affordable housing and rental homes; rental-home occupancy was 92.4% at quarter-end. It cautioned that acquisitions depend on suitable properties, financing and competition, and that demand and operating performance are not assured.
- Operating expenses included $126,000 of emergency windstorm tree removal and a $375,250 one-time settlement of a utility-billing dispute covering a prior ten-year period. Management also identified higher maintenance needs at recently acquired communities.
- Under agreements with 21st Mortgage, UMH may have to repurchase repossessed homes. Related loan balances were approximately $2.6 million for current community lending and $2.6 million for loans in acquired communities. The filing says the acquired-community program is not being used for new customers. Management did not expect ordinary-course claims or litigation to materially affect results; legal proceedings were reported as none.
- After quarter-end, UMH established a preferred-stock ATM program for up to $100 million and had received approximately $8.7 million net from Series D sales through October 30. It also drew another $10 million on its unsecured facility, repaid a bank loan of approximately $3.6 million and reduced its margin loan by approximately $10 million. A new office lease was entered into with a landlord entity in which the chairman owns a 24% interest; management said rents were comparable to market.
- Key stated risks include interest rates and refinancing, debt covenant compliance, access to capital, occupancy and rental rates, acquisition integration, competition, manufactured-home buyer financing, securities-market values and continued REIT qualification. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of the earnings turnaround reflects core property operations versus volatile fair-value gains on the REIT securities portfolio; compare GAAP income with FFO and normalized FFO.
- Whether acquired-community occupancy and higher operating costs improve as UMH integrates the properties and addresses deferred maintenance.
- Liquidity and leverage after the preferred-stock ATM sales, subsequent borrowings and margin-loan reduction; also monitor the securities portfolio’s unrealized losses and income contribution.
- Progress toward the approximately 800-home addition plan, rental-home occupancy and the sustainability of same-property occupancy and NOI growth.
- Potential exposure under home-repurchase commitments and the economics and related-party terms of the new office lease.