UMH Properties, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; interim financial statements are unaudited. UMH owns and operates manufactured-home communities, sells and leases homes, and invests in securities of other REITs. At quarter-end, it owned 82 communities with approximately 14,500 developed sites across seven states.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total income | $15.85 million | $13.43 million |
| Rental and related income | $14.85 million | $11.64 million |
| Manufactured-home sales | $1.00 million | $1.78 million |
| Net income | $0.57 million | $4.15 million |
| Net income (loss) attributable to common shareholders | $(1.32) million | $2.26 million |
| Basic and diluted earnings (loss) per common share | $(0.06) | $0.13 |
| Cash from operating activities | $5.83 million | $1.68 million |
| FFO attributable to common shareholders | $2.14 million | $4.66 million |
| Core FFO attributable to common shareholders | $2.42 million | $5.25 million |
- Rental income rose 28%, principally from 2013–14 acquisitions and increased rental-home income. Community operating expenses rose 39% to $8.29 million, reflecting acquisitions and severe winter weather. Income from community operations was $6.56 million, versus $5.69 million.
- Manufactured-home sales declined amid harsh winter weather. The company reported a $0.48 million loss from sales operations, compared with a $0.25 million loss in Q1 2013, despite gross profit percentage improving to 24% from 15% on higher selling prices.
- Net income fell largely because securities-sale gains were $0.51 million versus $3.31 million a year earlier. Preferred dividends of $1.89 million exceeded Q1 2014 net income, resulting in a loss attributable to common shareholders. Core FFO excluding securities-sale gains was $1.92 million, nearly level with $1.94 million in Q1 2013.
- Interest expense increased 31% to $2.21 million as average mortgages and loans payable rose to approximately $220.5 million from $146.6 million. Depreciation increased 44% to $3.44 million.
Financial position, debt and liquidity
- Total assets were $436.14 million at March 31, up from $407.98 million at year-end 2013. Net investment property and equipment was $320.24 million.
- Mortgages payable were $177.64 million and loans payable $53.62 million, for combined reported balances of $231.26 million, compared with $209.76 million at December 31. The company assumed approximately $18.1 million of mortgages in its acquisition and borrowed $10 million on its credit facility.
- Cash and cash equivalents were $7.76 million; available-for-sale securities were $60.70 million. Management reported $5.0 million available on its credit facility and $7.9 million available on revolving lines for home-sale financing and inventory. It also reported 26 unencumbered properties.
- Operating cash flow was $5.83 million. Investing activities used $11.00 million and financing activities provided $5.32 million; cash increased by $0.15 million during the quarter.
- Shareholders’ equity was $196.87 million. Common shares issued and outstanding at quarter-end were 21.68 million. The company paid common dividends of $0.18 per share and preferred dividends at the stated 8.25% annual rate.
Material changes, outlook and risks
- On March 13, UMH acquired eight Ohio communities with 1,018 sites for $24.95 million; closing occupancy was approximately 70%. Overall occupancy was approximately 81%, same-store occupancy was 81.8% versus 80.8% a year earlier, and rental units were 91% occupied. Rental units represented approximately 15% of occupied sites.
- Management planned to add rental units as demand warrants and cited approximately 2,800 potential vacancies. It had definitive agreements to acquire six additional Ohio and Pennsylvania communities, approximately 589 sites, for about $17.6 million, subject to due diligence, with an anticipated third-quarter 2014 closing. Management stated that funds generated should be adequate to meet obligations over the next several years; this is forward-looking and not guaranteed.
- Management cited improving economic conditions and expected demand in the Marcellus and Utica shale regions. Key risks include occupancy and rental-rate performance, real-estate market conditions, acquisition and integration execution, debt repayment and refinancing, interest rates and covenants, access to capital, manufactured-home buyer financing, securities-market movements, and maintaining REIT tax qualification.
- A lawsuit concerning alleged discrimination and consumer-protection violations at Memphis Mobile City remained pending; oral argument on the company’s motion to dismiss took place May 1, 2014, and the court’s decision was pending. UMH said it believed the action lacked merit and that its insurer was supporting its defense.
- Under a home-buyer financing referral arrangement, UMH may have to purchase repossessed homes for 80%–95% of loan balances, subject to adjustments, and waive site rent while the lender owns the homes. Seven transactions totaling approximately $300,000 in loans were outstanding under the arrangement at quarter-end.
- Eleven REIT securities were temporarily impaired, with aggregate unrealized losses of $0.35 million; UMH said it had the ability and intent to hold them to recovery. Its portfolio had net unrealized gains of $4.44 million. Interest-rate swaps hedged approximately $23.45 million of mortgage balances and were reported highly effective.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material change in risk factors from the 2013 Form 10-K. The company early adopted ASU 2014-08 on discontinued-operation reporting and expected no material impact.
Investor facts to verify
- How much of rental-income growth and operating cash flow is attributable to acquired communities versus same-store performance, and how occupancy and rents develop from the reported levels.
- Whether the six-community acquisition closes on anticipated terms, and the financing, occupancy and integration costs of both completed and planned acquisitions.
- Debt maturities, credit-facility terms and covenant headroom, especially given rising borrowings and management’s dependence on refinancing and capital-market access.
- Whether manufactured-home sales losses, winter-related operating costs and the gap between net income and common-shareholder results improve in subsequent quarters.
- Developments in the Memphis Mobile City litigation and any potential exposure under the home-repossession purchase agreement.
- Performance and valuation of the REIT securities portfolio, including the temporarily impaired positions and reliance on securities income and sales.