UMH Properties, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. UMH is a REIT that owns and operates manufactured-home communities, rents and sells homes, and invests in other REIT securities. At quarter-end it owned 95 communities with approximately 16,600 developed homesites in seven states.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total income | $21.7 million | $18.6 million | $59.6 million | $52.6 million |
| Rental and related income | $19.0 million | $16.4 million | $54.1 million | $47.0 million |
| GAAP net income | $1.05 million | $0.63 million | $1.97 million | $2.67 million |
| Net loss attributable to common shareholders | $(0.84) million | $(1.26) million | $(3.70) million | $(2.99) million |
| Common loss per share | $(0.03) | $(0.06) | $(0.14) | $(0.14) |
| Community NOI (non-GAAP) | $9.63 million | $7.75 million | $26.83 million | $21.73 million |
| Normalized FFO (non-GAAP) | $4.05 million | $2.84 million | $10.37 million | $7.26 million |
- Operating performance: Rental and related income grew 16% for Q3 and 15% for the nine-month period, primarily from acquisitions, higher occupancy, and rental-home income. Same-property occupancy rose to 83.8% from 83.1% a year earlier. Rental-home occupancy was 94.1%, versus 92.7%.
- Margins and home sales: Community operating expenses were 49.2% of rental and related income in Q3 and 50.4% for the nine months, down from 52.6% and 53.7%, respectively. Manufactured-home sales produced operating losses of $0.16 million in Q3 and $0.88 million for the nine months.
- Cash flow: Nine-month operating cash flow was $14.0 million, compared with $14.5 million. Investing used $86.9 million, largely for acquisitions and property/equipment purchases; financing provided $72.7 million. Cash declined $0.2 million to $7.9 million.
- Debt and liquidity: At September 30, mortgages payable were $266.0 million and loans payable were $69.2 million. Total liabilities were $346.5 million. Cash was $7.9 million and available-for-sale securities were $61.4 million. UMH reported $5.0 million available on its unsecured credit facility, a further $15.0 million potentially available under its accordion, $6.0 million on home-sales lines, and approximately $9.0 million on an inventory facility. The weighted-average interest rate was 4.5%, compared with 4.8% at September 30, 2014.
Material changes and notable items
- Investment property and equipment increased 18% to $429.2 million net of depreciation, reflecting acquisitions and expansion of the rental-home portfolio. UMH acquired seven communities for $45.1 million during the nine months, adding 1,520 homesites; the acquired properties had average occupancy of approximately 70% at acquisition.
- Mortgage debt rose 46% from December 31, 2014, chiefly to fund acquisitions and rental-home investment. Interest expense increased 25% for the nine months, while depreciation rose 22%. Net income declined year over year for the nine-month period, in part because securities-sale gains fell to $0.13 million from $1.27 million.
- The securities portfolio had net unrealized losses of $4.08 million at September 30, 2015. Nine-month other comprehensive loss was $9.27 million, mainly reflecting unrealized investment losses.
- Management reported a $125,000 payment associated with settlement of the Memphis Mobile City lawsuit; the settlement was completed in March 2015 and UMH stated it had no further liability. UMH was constructing a replacement community at the site, expected to cost approximately $5.4 million.
Outlook, risks and contingencies
- Management plans to continue pursuing acquisitions and adding rental homes, with additions in the remainder of 2015 and 2016 dependent on demand. It cited approximately 3,000 potential vacancies to fill and demand opportunities in the Marcellus and Utica shale regions and Nashville.
- Management said it expects normalized community operating expenses to be about 50% of revenue where the community pays water and sewer costs, or 40% or less where residents pay directly. It also stated that available funds should be adequate to meet obligations over the next several years. These are expectations, not guarantees.
- On October 16, 2015, UMH completed the second tranche of a six-community acquisition for $36.1 million, adding 1,254 sites with approximately 56% occupancy at acquisition. On October 20, it issued 1,801,200 Series B preferred shares at $25 each, receiving approximately $43.3 million net, with an 8.0% cumulative dividend. Proceeds were intended for acquisitions and general corporate purposes, including possible short-term debt repayment.
- Homebuyer access to financing remains a constraint on sales operations. Other stated risks include maintaining occupancy and rents, acquisition and integration execution, debt refinancing and covenant compliance, interest-rate changes, capital-market access, securities-market volatility, and maintaining REIT tax status.
- UMH had agreed to buy certain homes repossessed by 21st Mortgage if related borrowers default. The reported loan balances were approximately $4.6 million across 104 loans under one arrangement and $2.5 million for loans tied to previously acquired communities; actual exposure depends on defaults and contractual adjustments.
Important facts for investors to verify
- Whether occupancy and rental-home demand continue to improve, particularly at recently acquired, lower-occupancy communities.
- Whether acquisition returns and operating-cost reductions offset higher debt, interest expense, and depreciation.
- The performance and valuation of the REIT securities portfolio, including the duration and recoverability of unrealized losses.
- How the October acquisition and Series B preferred issuance affect leverage, preferred-dividend obligations, liquidity, and future common-share issuance under the DRIP.
- Actual manufactured-home loan defaults and any resulting repurchase obligations, and the costs and progress of the Memphis site redevelopment.