UMH Properties, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. UMH is a REIT operating manufactured-home communities and home rental and sales businesses. At quarter-end, it owned 98 communities with approximately 17,800 developed sites across seven states.
Financial performance and condition
- Revenue: Total income was $23.50 million, up 28% year over year. Rental and related income was $21.79 million, up 27%; manufactured-home sales were $1.72 million, up 52%.
- Operating results: Community NOI, a company-defined non-GAAP measure, rose 34% to $11.23 million. The community operating expense ratio improved to 48.5% from 51.2%. Same-property occupancy increased to 83.5% from 82.1%, while same-property NOI increased 16.7%.
- Profit and per-share results: GAAP net income was $1.91 million versus $0.72 million a year earlier. After preferred dividends of $2.79 million, the net loss attributable to common shareholders was $0.88 million, or $0.03 per share, compared with a $1.17 million loss, or $0.05 per share. FFO attributable to common shareholders was $4.62 million versus $3.05 million; normalized FFO was $4.39 million versus $3.23 million. These are non-GAAP measures.
- Other income and expenses: Interest expense increased 34% to $3.93 million, primarily reflecting higher average borrowings. Depreciation rose 31% to $5.53 million. Dividend income increased to $1.46 million. The securities portfolio generated $8.52 million of unrealized appreciation during the quarter; this contributed to comprehensive income but was not operating cash flow.
- Cash flow: Operating activities provided $7.66 million, compared with $7.24 million. Investing used $18.54 million, mainly for property and equipment and securities purchases; financing provided $12.26 million. Cash increased $1.38 million to $7.91 million.
- Assets and liquidity: Total assets were $624.04 million. Cash was $7.91 million and available-for-sale securities were $91.40 million. Management reported $20 million available on an unsecured credit facility, with a further $15 million potentially available under an accordion feature, plus availability on home-sales and inventory facilities. Twenty-two properties were unencumbered.
- Debt: Mortgages, net of issuance costs, were $288.64 million; loans payable, net, were $71.95 million. Mortgage balances before issuance costs totaled $292.14 million at a 4.5% weighted average rate. Loans payable had a 3.5% weighted average rate; $30.74 million was outstanding on a margin loan at 2.0%. Mortgages and loans increased during the quarter.
- Margins and distributions: Manufactured-home sales gross margin was 24%, versus 22%; sales operations nevertheless had a $0.52 million loss. The company paid $4.88 million in common dividends and $3.19 million in preferred dividends during the quarter.
Changes versus the prior comparable period
- Revenue and Community NOI grew, primarily due to 2015 acquisitions, higher rental rates, improved occupancy, and growth in rental homes. Community operating expenses rose 20%, less than rental income growth.
- Net income improved, but common shareholders still incurred a loss because preferred dividends exceeded net income. Interest and depreciation costs increased alongside the expanded property and debt base.
- Rental-home occupancy was 94.8%, compared with 92.9% at December 31, 2015. UMH added 182 rental homes during the quarter; management reported approximately 3,900 rental homes in its portfolio.
- Available-for-sale securities rose 22% from year-end, reflecting purchases and unrealized gains. The portfolio included $6.47 million in net unrealized gains at March 31, 2016.
Outlook, commentary, risks and unusual items
- Management planned to add 800 rental homes in 2016 and continue pursuing acquisitions and community improvements. It cited demand for affordable housing and expected rental-home growth, but cautioned there was no assurance suitable acquisitions or continued rental demand would materialize.
- Management stated that operating funds should be adequate to meet obligations over the next several years. This is not a quantified earnings or FFO forecast.
- On April 5, 2016, UMH sold 2 million Series B preferred shares at $25.50 per share, receiving approximately $49.1 million net. The preferred stock carries an 8.0% cumulative dividend and ranks equally with Series A preferred stock. Proceeds were designated for general corporate purposes, potentially including investment, acquisitions, or debt repayment.
- On May 2, 2016, UMH obtained two fixed-rate mortgages totaling approximately $8.26 million at 4.38% and 4.32%, using proceeds to repay mortgages carrying an average 6.66% rate.
- Risks highlighted include real-estate and market conditions, interest rates, debt repayment and refinancing, access to capital, occupancy and rents, manufactured-home buyer financing, securities market fluctuations, and maintaining REIT tax status. The filing reported no material change in risk factors and no material litigation proceedings.
- Under agreements with 21st Mortgage, UMH may have to buy repossessed homes if borrowers default. Related loan balances were approximately $4.5 million under one agreement and $5.3 million for loans associated with certain acquired communities; the filing does not quantify expected losses. A Triad financing program began in 2016, with approximately $606,000 of purchased loans included in receivables at quarter-end.
- Management classified securities with $2.55 million of unrealized losses as temporarily impaired, citing its intent and ability to hold them for recovery. The quarter’s large securities valuation gains are market-sensitive and may reverse.
Important facts for investors to verify
- How much Community NOI and occupancy growth came from same-property performance versus acquisitions and rental-home additions.
- Whether rental-home additions and high occupancy can be sustained, and whether management’s 800-home 2016 plan was achieved.
- Debt maturities, covenant headroom, variable-rate exposure, margin-loan collateral terms, and the availability and cost of refinancing.
- The sustainability of cash generation relative to common and preferred dividends, capital spending, and growth plans.
- Subsequent use of the approximately $49.1 million Series B proceeds and the resulting preferred-dividend burden.
- Potential exposure from home repossession purchase commitments and the credit performance of loans acquired through the Triad program.
- The market value and concentration of the REIT securities portfolio, including potential reversals of unrealized gains.