UMH Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. UMH is a REIT operating manufactured-home communities, renting homes and sites, selling and financing manufactured homes, and investing in other REIT securities. At quarter-end it owned 115 communities with approximately 20,700 developed sites across eight states.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total income | $33.4 million | $28.7 million | $95.3 million | $84.0 million |
| Rental and related income | $28.7 million | $25.9 million | $84.2 million | $75.7 million |
| Community NOI | $15.4 million | $13.5 million | $45.5 million | $40.0 million |
| Net income (loss) | $(6.3) million | $3.3 million | $(8.5) million | $9.1 million |
| Net loss attributable to common shareholders | $(11.5) million | $(5.2) million | $(23.7) million | $(6.9) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $24.7 million | $29.2 million |
- Q3 total income rose 17%; rental income rose 11%, manufactured-home sales rose 67%, and Community NOI increased 14%. Nine-month total income and Community NOI each increased 14% year over year.
- Q3 Community NOI margin was approximately 53.7% of rental income, versus 52.4% a year earlier. The reported operating expense ratio improved to 46.3% from 47.6% in Q3 and to 46.0% from 47.1% year to date.
- Reported losses were heavily affected by fair-value declines in marketable securities: $10.5 million in Q3 and $19.8 million for the nine months. The company adopted accounting that records such fair-value changes in earnings. Management’s non-GAAP Normalized FFO was $7.1 million for Q3 versus $4.9 million, and $20.1 million for nine months versus $15.4 million; these measures are not substitutes for GAAP results or cash flow.
- Manufactured-home sales were $4.7 million in Q3 and $11.1 million year to date. Gross profit percentages were 26% and 24%, respectively; the sales operation nevertheless reported losses of $70,000 for Q3 and $651,000 year to date.
Balance sheet, debt and liquidity
- At September 30, total assets were $868.5 million, total liabilities $415.4 million, and shareholders’ equity $453.1 million. Net investment property and equipment was $652.5 million.
- Cash and cash equivalents were $8.9 million; marketable securities were $130.9 million, with $8.2 million of net unrealized portfolio losses. Cash, cash equivalents and restricted cash totaled $14.8 million.
- Mortgages, net of issuance costs, were $313.4 million; loans payable, net, were $87.0 million. Mortgages had a 4.2% weighted-average rate before issuance costs and a 6.3-year weighted-average maturity. The unsecured revolving facility had $35 million drawn at 3.83%; the margin loan balance was $25.8 million at 2.5%.
- Management reported approximately $15 million available on the unsecured revolver, with a further $75 million accordion subject to conditions; approximately $12.7 million available for inventory financing and $6 million for home-sales financing. Seventy communities were unencumbered. Net debt to total market capitalization was approximately 31%, or approximately 20% after subtracting securities, as calculated by the company.
- Operating cash flow was below the prior-year nine-month period. Investing activities used $87.4 million, principally for acquisitions, property and equipment, land development, and securities; financing activities provided $49.5 million. Cash and cash equivalents fell from $23.2 million at year-end 2017 to $8.9 million.
Material changes and management commentary
- UMH acquired three Indiana communities with 803 sites for approximately $24 million; occupancy at acquisition averaged 86%. It added 608 rental homes during the first nine months, bringing the portfolio to approximately 6,200 rental homes. Rental-home occupancy was 93.3% at quarter-end, versus 93.0% at December 2017; same-property occupancy reached 83.2%, up 40 basis points year over year.
- Management attributed rental growth to acquisitions, rent increases generally around 3%–5%, higher occupancy and additional rental homes. Same-property NOI increased 7.5% year to date. Management anticipated adding approximately 800 rental homes in 2018 and remained optimistic about affordable-housing demand, but provided no earnings or revenue guidance.
- The company issued $48.2 million net of Series D preferred stock proceeds in January and raised $24.2 million through the DRIP during the nine months. Series D pays a cumulative 6.375% dividend and is generally not redeemable before January 2023. Common dividends were $0.18 per share for the quarter; a further $0.18 dividend was declared for payment in December.
- Management cited acquisition and rental-home growth, increased personnel costs, and a harsh winter as expense drivers. A one-time $525,000 payroll expense affected year-to-date G&A. Debt and preferred distributions, capital spending and continued access to financing remain important funding demands.
Risks, contingencies and other items
- Risks include real-estate market conditions, competition, occupancy and rental rates, interest rates, debt refinancing and covenant compliance, access to capital, acquisition availability and integration, manufactured-home buyer financing and REIT tax qualification. Management cautioned that acquisitions and rental-home demand are not assured.
- Under agreements with 21st Mortgage, UMH may be required to repurchase repossessed homes. Related loan balances were approximately $3.0 million for the current program and $3.3 million in acquired communities; repurchase prices are subject to specified percentages and adjustments. The filing also reports approximately $14.1 million of notes acquired under the Triad loan program.
- Management said ordinary-course claims and litigation were not expected to materially affect results; the filing reports no legal proceedings and no off-balance-sheet arrangements. No material changes to risk factors or market-risk disclosures were reported. Disclosure controls were concluded effective, with no materially affecting change in internal control reported.
Investor verification priorities
- Review the marketable-securities portfolio, including the effect of fair-value changes on GAAP earnings and the concentration and liquidity of the REIT investments.
- Assess whether operating cash generation and available financing can support acquisitions, rental-home investment, debt service and cumulative preferred and common dividends.
- Verify same-property occupancy and NOI trends, rental-home additions and occupancy, and the economics of manufactured-home sales, including selling costs and financing exposure.
- Review debt maturities, variable-rate and refinancing exposure, credit-facility conditions, and potential repurchase obligations tied to repossessed homes.