UMH Properties, Inc. — FY2017 Form 10-K
Business and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below are unaudited. UMH is a REIT focused on manufactured-home communities, with related manufactured-home rentals, sales and financing, plus investments in other REIT securities. At year-end it operated 112 communities with approximately 20,000 developed sites across eight states; overall site occupancy was 81.4%. It owned approximately 5,600 rental homes, with 93.0% occupancy.
Financial performance and position
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Total income | $112.6 million | $99.2 million | Up 13.5% |
| Rental and related income | $101.8 million | $90.7 million | Up 12.3% |
| Community NOI | $54.0 million | $48.0 million | Up 12.3%; same-property NOI rose 7.6% |
| Community operating expense ratio | 47.0% | 47.0% | Unchanged |
| Net income | $12.7 million | $11.5 million | GAAP income before preferred dividends and redemption charge |
| Net loss attributable to common shareholders | $(7.7) million; $(0.24) per share | $(2.6) million; $(0.10) per share | Worsened, including preferred dividends and a $3.5 million preferred-stock redemption charge |
| Operating cash flow | $41.3 million | $29.4 million | Up $12.0 million |
| FFO / Core FFO / Normalized FFO | $20.0 / $23.5 / $21.7 million | $20.6 / $20.7 / $18.4 million | Non-GAAP supplemental measures; company cautions they are not cash flow or liquidity measures |
| Interest expense | $15.9 million | $15.4 million | Relatively stable |
| Cash and cash equivalents | $23.2 million | $4.2 million | Year-end balance |
| Total assets / total liabilities | $823.9 / $402.7 million | $680.4 / $363.4 million | Investment property increased 19% to $764.4 million |
| Mortgages and loans payable, net | $389.6 million | $351.3 million | Weighted-average mortgage rate 4.2%, before debt issuance costs; average mortgage term 6.9 years |
Manufactured-home sales increased 27% to $10.8 million, but the home-sales operation still recorded a $1.1 million loss, improved from a $1.4 million loss in 2016. Its gross profit percentage declined to 22% from 24%. Dividend income from the securities portfolio was $8.1 million; realized securities gains were $1.7 million, and year-end unrealized gains were $11.5 million.
In the fourth quarter of 2017, total income was $28.7 million and net income was $3.5 million; net loss attributable to common shareholders was $0.8 million, or $0.03 per share. The common-share loss included the effects of preferred dividends.
Material changes versus 2016
- Rental income and Community NOI growth reflected acquisitions, rent increases, higher same-property occupancy and expansion of the rental-home program. Same-property occupancy increased from 81.2% to 82.7%; overall occupancy rose from 81.0% to 81.4%.
- UMH acquired 11 communities with approximately 2,000 sites for $63.3 million. Acquired communities averaged 67% occupancy at acquisition, presenting lease-up potential but also execution risk.
- The rental-home portfolio grew by 948 homes, or 20.3%, to approximately 5,600. Rental-home occupancy increased from 91.5% to 93.0%.
- Share count increased: 1.4 million common shares were issued in a registered placement, and the DRIP generated $60.4 million including reinvested dividends. Common shares outstanding were 35.5 million at year-end, versus 29.4 million a year earlier.
- UMH issued $143.8 million of Series C preferred stock and redeemed all $91.6 million of Series A preferred stock. Management said the lower coupon would save approximately $1.4 million in annual preferred dividends. The redemption also generated a $3.5 million charge attributable to common shareholders.
- Investing cash outflow rose to $152.9 million, largely reflecting acquisitions, property investment and securities purchases; financing cash inflow rose to $130.6 million, supporting the investment program and capital returns.
Outlook, risks and unusual items
- Management intends to continue acquiring communities that can be improved and leased up, and to add rental homes as demand warrants. It estimated 2018 rental-home purchases of about 800 units costing approximately $32 million, including setup, and approximately $10 million of capital improvements, excluding expansions and rental-home purchases.
- Management described demand for affordable housing and rental homes as favorable, while noting manufactured-home sales remain constrained by limited chattel financing. It was optimistic that regulatory changes could improve buyers’ access to financing; this is not quantified guidance.
- Year-end liquidity included $23.2 million cash, $15 million available on the unsecured credit facility and $26.3 million available on home-sales and inventory lines. An additional $75 million could be available under the facility’s accordion, subject to conditions. UMH also held $133.0 million in REIT securities, encumbered by $37.2 million of margin borrowings. Subsequent to year-end it repaid $20 million on the unsecured facility.
- Debt and refinancing risks remain material: contractual obligations totaled $487.5 million, including principal and scheduled interest; $44.0 million of loan principal was scheduled for 2019–2020, and $240.5 million of mortgage principal was scheduled thereafter. The margin loans are due on demand and secured by securities. Credit agreements include financial covenants.
- Key operating risks include regional economic concentration, occupancy and rent pressure, acquisition integration and lease-up, deferred maintenance, manufactured-home financing and loan defaults, utility/environmental compliance, rent control at two New Jersey communities, and weather or flood exposure. Management reported no known environmental condition expected to have a material adverse effect and no material litigation expected, but these are not assurances against future losses.
- The 2011 flood-damaged Memphis Blues community remained under redevelopment; Phase I was completed in 2017. Litigation settlement expense of $125,000 was recorded in 2016. A $251,680 oil-and-gas bonus payment was recorded as other income in 2017, with an additional royalty arrangement.
- The Tax Cuts and Jobs Act introduced tax changes whose impact management was still evaluating. UMH adopted accounting guidance effective January 1, 2018 that moves unrealized changes in its equity securities portfolio through net income, potentially increasing reported earnings volatility.
- Common distributions remained $0.72 per share annually; the 2017 distribution was characterized entirely as return of capital for tax purposes. The Board declared another $0.18-per-share quarterly dividend for March 2018. Future distributions remain subject to earnings, liquidity, financing restrictions and Board discretion.
Important facts for investors to verify
- Reconcile reported net income with the common-share loss, preferred dividends, and the preferred-stock redemption charge; assess recurring earnings using GAAP results alongside the company-defined FFO measures.
- Check whether lower-occupancy acquired communities improve occupancy and NOI, and whether same-property occupancy and rent growth continue without disproportionate operating-cost increases.
- Review debt maturities, covenant headroom, variable-rate exposure, available borrowing capacity, and the terms and demand features of the securities-backed margin borrowing.
- Assess the risks, concentration and performance of the $133.0 million REIT securities portfolio, including the impact of market-price changes on earnings after the 2018 accounting change.
- Verify that cash from operations and external capital can support planned acquisitions, rental-home investment, capital improvements, debt service and distributions without excessive dilution or leverage.
- Monitor manufactured-home sales margins, financing availability, receivable collectability and repossession exposure, as well as redevelopment and lease-up progress at Memphis Blues and other vacant sites.
- Review the definitive financial statements and notes, subsequent events, and the 2018 proxy materials for updated capital, dividend, related-party and governance information.