UMH Properties, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2017. UMH is a REIT focused on manufactured-home communities, rental homes, manufactured-home sales and financing, and investments in other REIT securities. At quarter-end it operated 107 communities with approximately 19,400 developed sites across eight states.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total income | $28.7 million | $25.4 million | $84.0 million | $74.1 million |
| Rental and related income | $25.9 million | $23.1 million | $75.7 million | $67.3 million |
| GAAP net income | $3.3 million | $3.2 million | $9.1 million | $8.2 million |
| Net loss attributable to common shareholders | $(5.2) million | $(0.6) million | $(6.9) million | $(2.2) million |
| Community NOI | $13.5 million | $12.4 million | $40.0 million | $35.3 million |
| Normalized FFO attributable to common shareholders | $4.9 million | $4.5 million | $15.4 million | $13.1 million |
| Operating cash flow | Not stated separately for the quarter | $29.1 million | $21.4 million |
Q3 and nine-month diluted loss per common share was $0.15 and $0.21, respectively, versus $0.02 and $0.08 in the comparable 2016 periods. The common-share losses include preferred dividends and, in 2017, a $3.5 million charge related to redemption of Series A preferred stock. Community NOI and FFO measures are non-GAAP and should not be treated as substitutes for net income or cash flow.
Balance sheet and liquidity at September 30, 2017: Total assets were $785.8 million; total liabilities were $368.1 million; cash and cash equivalents were $14.8 million; and securities available for sale were $132.2 million. Mortgages payable, net of issuance costs, were $312.8 million. Loans payable, net, were $41.5 million. Gross mortgages before issuance costs were $316.4 million, at a weighted-average rate of 4.3%. Management reported net debt to total market capitalization of approximately 30%, or approximately 18% after deducting securities.
The company reported $29.1 million of operating cash flow, $115.4 million used in investing activities, and $96.9 million provided by financing activities for the first nine months. The unsecured revolving facility had no balance outstanding and provided $50 million of availability, with a conditional accordion up to $125 million. The filing also cited approximately $28 million available on inventory financing facilities and $6 million available on a home-sales revolving line. Securities were subject to $30.8 million of margin loans.
Material changes versus prior comparable periods
- Nine-month rental and related income rose 12%; Community NOI rose 13%. Management attributed growth principally to acquisitions, rent increases, improved same-property occupancy and more rental homes.
- Same-property occupancy increased to 83.0% from 81.3% a year earlier; same-property NOI increased 8.5% year over year for the nine-month period. Rental-home occupancy was 94.2% at quarter-end, versus 91.5% at December 31, 2016.
- Community operating expenses increased 11% for the nine months, slower than rental income growth. The nine-month operating expense ratio was reported as 47.1%, versus 47.5% in 2016; Q3’s ratio rose to 47.6% from 46.4%, with higher real estate taxes cited.
- Manufactured-home sales increased 22% for the nine months, and units sold rose to 169 from 132. Nine-month gross margin was 22% in both years. The sales operation remained loss-making, though its reported loss narrowed to $1.0 million from $1.3 million.
- Investment property and equipment increased 13% from year-end 2016, reflecting acquisitions and additions of 690 rental homes. Six communities with 1,354 sites were acquired during the period for approximately $40.5 million.
- Common-shareholder loss widened despite higher GAAP net income, reflecting higher preferred dividends and the Series A redemption charge. Nine-month FFO attributable to common shareholders declined to $13.4 million from $15.0 million; Normalized FFO increased to $15.4 million from $13.1 million.
Outlook, commentary, risks and unusual items
- Management expected to add approximately 800 rental homes during 2017, “as the market dictates,” and said demand for rental homes remained strong. It plans to pursue community acquisitions that yield above its cost of funds and invest in improvements and rental homes; it cautioned that suitable acquisitions and financing are not assured.
- Capital raising materially changed the preferred-stock structure: UMH issued 5.75 million Series C preferred shares at 6.75%, receiving approximately $139 million net, and redeemed all Series A shares for $91.6 million. It also raised approximately $22.5 million net from a common-stock placement and $48.7 million through the DRIP during the nine months.
- Investment securities had a fair value of $132.2 million and net unrealized gains of $12.8 million at quarter-end. Ten securities had temporary unrealized losses totaling $5.3 million; the largest disclosed loss was approximately $3.6 million on one holding. Management said it intended and was able to hold the securities to recovery.
- Potential repossessed-home purchase commitments under agreements with 21st Mortgage related to approximately $7 million of underlying loan balances at quarter-end. The company also held approximately $7.5 million of loans purchased under its Triad origination program.
- Management stated ordinary-course claims and litigation were not expected to have a material adverse effect; the filing reported no legal proceedings. There were no material changes to reported risk factors or market-risk disclosures, and no off-balance-sheet arrangements.
- Key risks include occupancy and rental-rate performance, acquisition availability and integration, competition, interest rates, refinancing and covenant compliance, access to capital, manufactured-home buyer financing and repossessions, securities-market movements, and continued REIT qualification.
Important facts for investors to verify
- Reconcile the common-shareholder loss with GAAP net income, preferred dividends, and the one-time Series A redemption charge; assess both reported and normalized FFO.
- Review acquisition performance and same-property occupancy/NOI, including the costs and time required to improve recently acquired, lower-occupancy communities.
- Track leverage, debt maturities, borrowing availability and the cost of capital, including margin-loan exposure and the terms of preferred and common equity financing.
- Monitor cash requirements for rental-home additions, community improvements, dividends and acquisitions against operating cash generation and capital-market access.
- Assess the value and concentration of the REIT securities portfolio, unrealized losses, and credit exposure from home-financing and repossession commitments.