UMH Properties, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance sheet compared with December 31, 2015. UMH is a REIT operating manufactured-home communities and home rental, sales and financing activities, and investing in other REIT securities. At quarter-end, it owned 100 communities with approximately 18,000 developed sites.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total income | $25.36 million | $21.69 million | $74.07 million | $59.59 million |
| Rental and related income | $23.10 million | $18.97 million | $67.31 million | $54.12 million |
| Community NOI (non-GAAP) | $12.38 million | $9.63 million | $35.32 million | $26.83 million |
| Net income | $3.20 million | $1.05 million | $8.16 million | $1.97 million |
| Net loss attributable to common shareholders | $(0.59) million | $(0.84) million | $(2.16) million | $(3.70) million |
| FFO attributable to common shareholders (non-GAAP) | $5.30 million | $3.94 million | $14.96 million | $9.83 million |
| Normalized FFO attributable to common shareholders (non-GAAP) | $4.47 million | $4.05 million | $13.11 million | $10.37 million |
- Rental and related income rose 22% in Q3 and 24% year to date; Community NOI rose 29% and 32%, respectively. Management attributed growth principally to acquisitions, rent increases, occupancy gains and rental-home additions.
- Community NOI margin was approximately 53.6% for Q3 versus 50.8% a year earlier, and 52.5% for the nine months versus 49.6%. The operating expense ratio improved to 46.4% in Q3 and 47.5% year to date.
- Preferred dividends exceeded net income, leaving common shareholders with a loss in both periods. Common loss per share was $(0.02) for Q3 and $(0.08) for the nine months, versus $(0.03) and $(0.14), respectively, in 2015.
- Manufactured-home sales were $2.25 million in Q3, down 17%, and $6.76 million year to date, up 24%. Sales volume increased 31% year to date to 132 homes; gross profit percentage declined to 20% for Q3 and 22% year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $21.40 million, up from $14.01 million. Investing used $59.96 million; financing provided $35.73 million. Cash declined $2.83 million to $3.71 million.
- At September 30, total assets were $669.04 million, up from $600.32 million at year-end. Total liabilities were $355.13 million; shareholders’ equity was $313.91 million.
- Mortgages payable, net of issuance costs, were $285.02 million; loans payable, net, were $56.58 million. Gross mortgages were $288.47 million, with a 4.4% weighted-average rate. The margin loan balance was $16.53 million at 2.0%. The company reported 25 unencumbered communities.
- Cash and marketable REIT securities were $3.71 million and $111.05 million, respectively; securities were subject to $16.53 million of margin loans. Reported available borrowing included $15 million on an unsecured facility, a further potential $15 million accordion, $6 million on the home-sales revolver and approximately $11.6 million on inventory facilities.
- Operating cash flow and liquidity were supplemented by $49.1 million net proceeds from a Series B preferred-stock issuance and $11.0 million raised through the DRIP. Preferred dividends paid during the nine months totaled $10.77 million; common dividends totaled $14.81 million.
Material changes, outlook and risks
- UMH added 715 rental homes during the first nine months, bringing its rental-home portfolio to approximately 4,400; rental-home occupancy was 93.5%. Management expected to add more than 800 homes during 2016, depending on market conditions. Same-property occupancy increased 200 basis points to 84.9% and same-property NOI increased 23.1% year over year.
- In September, UMH acquired two Ohio communities for approximately $2.95 million; their average occupancy was approximately 64%. Management expected to close on the remaining communities in a five-community, $17.02 million Ohio portfolio before year-end, subject to due diligence and customary conditions; completion was not assured.
- Management said it believed generated funds would meet obligations over the next several years. It intends to pursue acquisitions and invest in property improvements, but noted that suitable properties, financing and continued rental demand are not assured. No formal earnings guidance was provided.
- Interest expense increased 19% year to date, principally reflecting higher average debt balances. A subsequent October 31 refinancing obtained a $16.35 million fixed-rate mortgage at 3.85%, used partly to repay an approximately $9.7 million mortgage at 5.785%.
- The securities portfolio generated $1.90 million of realized gains year to date and $20.96 million of net unrealized gains at quarter-end. These market-value movements contributed to comprehensive income but are distinct from community operating performance. Securities available for sale were $111.05 million, and management generally limits such investments to approximately 20% of undepreciated assets.
- Potential manufactured-home repossession purchase commitments related to 21st Mortgage covered approximately $5 million of loans in current communities and a separate approximately $5 million in acquired communities; purchase prices are subject to specified percentages and adjustments. UMH also reported approximately $2.92 million of loans purchased under its Triad financing program.
- Management cited risks including real-estate and securities market changes, interest rates, competition, acquisition availability and integration, occupancy and rents, debt repayment/refinancing and covenant compliance, access to capital, homebuyer financing and REIT qualification. It reported no material change in risk factors, no material litigation, effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Check whether community occupancy, rental-home growth and NOI gains continued, and distinguish same-property performance from acquisition-driven growth.
- Assess common-shareholder returns after cumulative preferred dividends, and review FFO and Normalized FFO alongside GAAP earnings and cash flow.
- Verify cash availability, facility capacity and terms, debt maturities and covenants, and the cost and use of the margin borrowing and securities portfolio.
- Confirm completion and economics of the remaining Ohio portfolio acquisition and progress against the stated rental-home expansion plan.
- Review exposure and possible losses under repossession purchase commitments and the Triad loan-origination program.