UMH Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited consolidated results. UMH owns and operates manufactured-home communities and also leases, sells, and finances homes. At quarter-end, it owned 82 communities with approximately 14,500 developed sites. Two July acquisitions increased the portfolio to 88 communities and approximately 15,100 sites.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total income | $18.15 million | $16.10 million | $34.00 million | $29.52 million |
| Rental and related income | $15.77 million | $13.76 million | $30.62 million | $25.40 million |
| Net income | $1.48 million | $1.62 million | $2.04 million | $5.77 million |
| Net income (loss) attributable to common shareholders | $(0.41) million | $(0.27) million | $(1.73) million | $1.99 million |
| Common-share loss/income per share | $(0.02) | $(0.02) | $(0.08) | $0.11 |
| Funds from operations (FFO), attributable to common shareholders | $3.21 million | $2.79 million | $5.35 million | $7.45 million |
| Core FFO, excluding securities gains | $2.51 million | $2.69 million | $4.42 million | $4.64 million |
Rental growth principally reflected acquisitions and additional rental homes. Same-store occupancy rose to 82.6% from 81.3% a year earlier; overall occupancy was 81.7%, including recently acquired sites. Rental homes were 92.6% occupied. Q2 community operating income (rental income less community operating expenses) was $7.43 million, up from $6.84 million.
Manufactured-home sales were $2.38 million in Q2 and $3.38 million for the half year. The half-year sales decline from $4.13 million was attributed partly to severe winter weather and regulatory obstacles. Sales operations recorded losses of $0.32 million in Q2 and $0.80 million for the half year, reflecting selling costs; management cited investment in advertising and retail sales centers. The six-month gross profit percentage on home sales improved to 20% from 15%.
Cash flow, debt, and liquidity
- Six-month cash provided by operations was $7.95 million, versus $3.77 million in 2013. Investing used $19.55 million; financing provided $14.99 million. Cash ended at $11.01 million.
- At June 30, total assets were $449.84 million and total liabilities $248.66 million. Mortgages payable were $176.48 million and other loans payable $62.99 million, approximately $239.48 million combined.
- Cash plus marketable securities available for sale totaled approximately $73.83 million. The securities portfolio had a fair value of $62.82 million and net unrealized gains of $5.54 million.
- Management reported $5.0 million available on its credit facility and $6.0 million available on revolving lines for home sales and inventory financing; 26 of 82 properties were unencumbered. It stated that anticipated funds would be adequate for obligations over the next several years.
- Six-month common and preferred dividends paid were $7.84 million and $3.78 million, respectively. Common shares issued and outstanding at June 30 were 22.46 million; the company raised $15.25 million through its dividend reinvestment and stock purchase plan, including reinvestments.
Changes, outlook, and risks
- Rental and related income increased 15% in Q2 and 21% for the half year, while community operating expenses rose 21% and 29%, respectively. Acquisitions, rental-unit additions, and harsh winter weather contributed to expense growth.
- Interest expense rose 34% in Q2 and 33% for the half year, primarily due to higher average debt associated with acquisitions. Depreciation also increased with property and rental-home additions. Half-year net income and FFO were lower than in 2013, when securities-sale gains were substantially higher.
- UMH acquired eight Ohio communities for $24.95 million in March, assuming approximately $18.1 million of mortgages. After quarter-end, it acquired four Pennsylvania communities for $12.2 million and two Ohio communities for $5.4 million. A further Pennsylvania acquisition, priced at approximately $4.2 million, was pending, subject to due diligence. Management said it would pursue opportunistic growth, particularly in the Marcellus and Utica shale regions, and add rental homes as demand warrants; no earnings guidance was provided.
- Management described moderate economic recovery and increased housing demand, but identified risks including occupancy and rental rates, acquisition integration and financing, debt refinancing and covenants, interest rates, homebuyer financing and repossessions, securities-market movements, regulation, natural disasters, and continued REIT tax qualification.
- A Memphis community lawsuit alleges discrimination and consumer-protection violations following 2010 flooding; the company said it believes the case lacks merit, its insurer is supporting the defense, and it was awaiting a court decision on a motion to dismiss. Separately, under a home-loan referral agreement, UMH may have to repurchase repossessed homes for 80%–95% of loan balances and waive site rent; 40 transactions with original loans of approximately $1.8 million were outstanding at June 30.
- Variable-rate exposure is partly hedged through swaps on specified mortgage balances; management considered the hedges highly effective. The filing reports no material changes in market-risk disclosures, risk factors, or internal controls.
Important facts for investors to verify
- Whether acquisition-driven rent growth and occupancy gains translate into improved operating results after rising community costs, interest, and depreciation.
- The performance and funding needs of the home-sales and rental-home programs, including the planned retail sales centers and potential repossession repurchase obligations.
- Debt availability, maturities, refinancing terms, covenant compliance, and the effect of additional borrowing used for acquisitions.
- The sustainability of dividends relative to cash generation and the impact of securities gains and unrealized portfolio movements on reported results.
- Developments in the Memphis litigation and completion, financing, and integration of announced or pending acquisitions.