UMH Properties, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. UMH is a REIT operating manufactured-home communities, renting and selling homes, and investing in securities of other REITs. At quarter-end it owned 114 communities with approximately 20,600 developed sites across eight states.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total income | $32.1 million | $28.8 million | $61.9 million | $55.3 million |
| Rental and related income | $28.2 million | $25.3 million | $55.5 million | $49.8 million |
| Community NOI | $15.5 million | $13.4 million | $30.0 million | $26.5 million |
| Net income (loss) | $20.1 million | $3.6 million | $(2.1) million | $5.9 million |
| Net income (loss) attributable to common shareholders | $14.9 million | $(0.2) million | $(12.2) million | $(1.7) million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $14.4 million | $16.6 million |
- Q2 Community NOI increased 16%; first-half NOI increased 13%. Same-property occupancy rose 100 basis points year over year to 83.3%; first-half same-property NOI rose 7.3%.
- Community operating expense ratio improved to 45.0% in Q2 from 46.9%, and to 45.9% for the first half from 46.9%.
- Manufactured-home sales rose 10% in Q2 and 17% in the first half. Gross profit margin was 25% versus 22% in Q2 and 23% versus 22% year to date. Sales operations nevertheless remained loss-making: $0.3 million in Q2 and $0.6 million in the first half.
- Q2 GAAP income was materially boosted by a $16.6 million increase in marketable-securities fair value. For the first half, the portfolio recorded a $9.3 million fair-value decrease. The company adopted accounting guidance requiring such changes to run through earnings; accordingly, reported GAAP results are volatile. First-half Normalized FFO attributable to common shareholders was $13.0 million, versus $10.5 million a year earlier; Q2 was $6.7 million versus $5.5 million.
Balance sheet, cash flow and capital
- At June 30, total assets were $862.8 million, total liabilities $400.2 million, and shareholders’ equity $462.5 million. Cash and cash equivalents were $15.2 million; marketable securities were $138.1 million.
- Net investment property and equipment was $642.9 million. Mortgages, net of issuance costs, were $301.8 million; loans payable, net, were $84.6 million. Mortgages were predominantly fixed-rate, with a 4.2% weighted average rate before debt-cost effects and 6.4-year weighted average maturity. The company reported net debt to total market capitalization of approximately 30%, or 19% after subtracting securities.
- First-half operating cash flow of $14.4 million was below $16.6 million a year earlier. Investing used $61.5 million, including community acquisitions and property, equipment and securities purchases; financing provided $39.1 million. Cash, cash equivalents and restricted cash ended at $20.0 million.
- UMH issued $48.2 million net proceeds from 6.375% Series D preferred stock and raised $16.4 million through its DRIP. It paid $13.1 million in common dividends and $9.8 million in preferred dividends during the first half.
- At quarter-end, $35 million was outstanding on the $50 million unsecured revolving facility, leaving $15 million available, plus a conditional $75 million accordion. Management also reported approximately $6 million available for home-sale financing and $16.6 million for inventory financing. Securities were subject to a $27.2 million margin loan.
Material changes and management commentary
- UMH acquired two Indiana communities, Camelot Village and Red Bud Estates, for approximately $20.5 million. The 669 sites were about 91% occupied at acquisition. A $20 million unsecured-line draw funded the purchase; after quarter-end, the properties secured a $13.4 million Freddie Mac mortgage at 4.27%, maturing in 2028.
- The company added 389 rental homes in the first half, bringing its rental-home portfolio to approximately 6,000, or 29.1% of sites. Rental-home occupancy was 94.0% at June 30, compared with 93.0% at year-end. Management anticipated adding approximately 800 homes in 2018.
- Management cited acquisitions, rent increases, higher occupancy and rental-home additions as drivers of growth. It reported typical annual rent increases of approximately 3%–5%. It also noted stronger home sales but said limited chattel-financing options constrain buyers’ ability to qualify.
- General and administrative expense rose 25% in Q2 and 17% in the first half, partly reflecting personnel costs and a one-time $525,000 payroll expenditure for two employees. Community expenses also reflected the harsh 2018 winter and acquired properties’ deferred maintenance.
Outlook, risks and contingencies
- Management plans continued acquisitions and investment in community improvements and rental homes, but said suitable properties, financing and acquisition opportunities are not assured. No earnings or revenue guidance is provided in the filing; the approximately 800-home target is the stated operational expectation.
- Risks identified include economic and real-estate conditions, competition, maintaining rents and occupancy, interest rates and debt refinancing, access to capital, integration of acquisitions, manufactured-home buyer financing and market volatility in REIT securities. Management also cautioned that interim results do not necessarily indicate full-year results.
- Under agreements with 21st Mortgage, UMH may have to buy repossessed homes at specified percentages of loan balances. Relevant loan balances were approximately $3.1 million under the current-community program and $3.5 million in acquired communities. Management said ordinary-course claims and litigation were not expected to have a material adverse effect. The filing states there were no off-balance-sheet arrangements.
Most important facts for investors to verify
- How much reported earnings depend on securities fair-value movements, and how portfolio volatility affects results and liquidity.
- Whether same-property occupancy, NOI growth and the 2018 rental-home addition target are achieved, and the returns on recent acquisitions.
- Available borrowing capacity, debt maturities and covenants, and the impact of the margin loan and future refinancing costs.
- Whether manufactured-home sales growth can overcome financing constraints and the sales operation’s reported losses.
- Potential exposure under repossessed-home purchase agreements and the sustainability of common and preferred dividends.