UMH Properties, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. UMH is a REIT focused on manufactured-home communities, home rentals and sales, and investments in other REIT securities. It operated 118 communities with approximately 21,500 developed homesites across eight states.
Financial performance and liquidity
- Revenue: Total income rose 15% to $34.3 million. Rental and related income increased 12% to $30.6 million; manufactured-home sales grew 44% to $3.6 million.
- Profit: Net income was $11.0 million, or $0.29 per basic share, versus a $22.2 million net loss in Q1 2018. Net income attributable to common shareholders was $5.9 million, or $0.16 per basic share ($0.15 diluted), versus a $27.2 million loss, or $0.76 per share. The reversal chiefly reflects the marketable-securities fair-value result: an $8.6 million gain in Q1 2019 versus a $25.9 million loss in Q1 2018.
- Operating measures: Community NOI, a non-GAAP measure, increased 7% to $15.5 million. Same-property occupancy rose 120 basis points to 83.1%. Rental-home occupancy was 93.6%. Home-sale gross margin improved to 29% from 22%; sales operations nevertheless reported a $103,000 loss, versus a $293,000 loss.
- FFO measures: FFO attributable to common shareholders was $14.7 million versus negative $19.5 million, reflecting the securities valuation swing. Core FFO was $6.1 million versus $6.4 million; Normalized FFO was $6.5 million versus $6.3 million. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash flow: Operating cash flow was $12.2 million, up from $10.3 million. Investing activities used $14.7 million; financing provided $3.7 million. Cash, cash equivalents and restricted cash ended at $13.9 million, including $7.3 million unrestricted cash.
- Assets and debt: Total assets were $899.7 million and total liabilities $465.0 million at quarter-end. Mortgages, net of issuance costs, were $329.3 million; loans payable, net, were $115.1 million. Mortgages were fixed-rate, with a 4.3% weighted-average rate and six-year weighted-average maturity. The company reported net debt to total market capitalization of approximately 34%, or approximately 26% after subtracting securities.
- Liquidity: Marketable securities totaled $108.7 million, with $32.3 million outstanding on a margin loan. UMH reported $25 million available on its $75 million unsecured revolver, plus a potential $50 million accordion subject to conditions; approximately $11.8 million was available on inventory-financing revolvers. Three mortgages totaling approximately $13.9 million come due within 12 months.
Material changes and management commentary
- Rental-income growth reflected 2018 acquisitions, higher rents, improved occupancy, and additional rental homes. Community expenses rose 19%, including higher water and sewer, payroll, and rental-home costs, as well as a one-time $375,250 settlement of a utility-billing dispute covering a prior ten-year period. The reported expense ratio was 49.4% versus 46.8%; excluding the settlement, Q1 2019 was 48.2%.
- UMH added 153 rental homes in the quarter and had approximately 6,700 rental homes. Management anticipated adding approximately 800 during 2019. Home sales increased to 66 from 54.
- Interest expense increased 30% to $4.6 million, primarily due to higher average loans payable; management cited an increase from $67.5 million to $111.5 million. The increase in loans payable was mainly related to a $6 million rise in a revolver secured by eligible notes receivable.
- Management described demand for rental homes and affordable housing as strong and intended to continue acquisitions and investment in community improvements, subject to suitable properties and financing. It cautioned that future acquisitions and rental-home demand are not assured.
Outlook, events, and risks
- UMH had contracted to acquire two communities for approximately $45.3 million, with closing expected in Q2 or Q3 2019.
- After quarter-end, UMH sold 4.0 million Series C preferred shares for approximately $96.6 million net proceeds. Planned uses included general corporate purposes, investments, acquisitions, and possible short-term debt repayment. The offering increases preferred-dividend obligations.
- After quarter-end, the company expanded its home-financing revolver from $10 million to $15 million. It also declared the next quarterly common dividend of $0.18 per share.
- Potential risks include real-estate and interest-rate conditions, competition, occupancy and rental rates, acquisition availability and integration, refinancing and covenant compliance, access to capital, home-buyer financing and repossessions, securities-market fluctuations, and continued REIT qualification.
- UMH disclosed purchase obligations relating to homes repossessed by 21st Mortgage: underlying loan balances were approximately $2.9 million under one agreement and $3.0 million for homes in acquired communities. The company also held approximately $18.4 million of loans acquired through its Triad program. Management said ordinary-course claims and litigation were not expected to have a material adverse effect. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether reported earnings growth persists when securities fair-value gains and losses are excluded; compare recurring operating results and Core/Normalized FFO.
- Whether occupancy, rental-home utilization, and Community NOI continue to improve, and whether operating-cost growth moderates after acquisitions and the utility settlement.
- Actual deployment and returns on the $96.6 million preferred offering proceeds, and the effect of added preferred dividends and share-count changes.
- Funding and closing of the approximately $45.3 million community acquisition, upcoming mortgage maturities, revolver availability, and debt covenant headroom.
- Potential losses or cash requirements under the repossessed-home purchase commitments and collectability of manufactured-home receivables.