UMH PROPERTIES, INC. annual report, FY2018

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UMH Properties, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This annual filing includes fourth-quarter results; it is not a standalone Q4 report. The company is a REIT focused on manufactured-home communities, with additional rental-home, home-sales and REIT-securities activities.

Business context and portfolio

  • Owned and operated 118 communities with approximately 21,500 developed homesites across eight states. Acquired six communities with 1,615 sites for approximately $59.1 million during 2018.
  • Owned approximately 6,500 rental homes at year-end, about 30% of developed homesites; rental-home occupancy was 92.3%.
  • Overall community occupancy rose to 82.0% from 81.4%; same-property occupancy increased to 83.0% from 82.6%.

Financial results and key metrics

  • Income: Total income was $129.6 million, up 15.0% year over year. Rental and related income increased 12% to $113.8 million; manufactured-home sales rose 45% to $15.8 million.
  • Community operations: Community NOI, a non-GAAP measure, increased 12.8% to $60.9 million. The operating expense ratio improved to 46.5% from 47.0%. Same-property NOI increased 7%.
  • Profit: GAAP net loss was $36.2 million versus net income of $12.7 million in 2017. Net loss attributable to common shareholders was $56.5 million, or $1.53 per share, compared with a $7.7 million loss, or $0.24 per share. The 2018 results included a $51.7 million decline in fair value of marketable securities.
  • Supplemental performance: Normalized FFO attributable to common shareholders was $27.5 million versus $21.7 million; management reported normalized FFO per share growth of 12%. Core FFO was $27.0 million. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
  • Home sales: The company sold 295 homes versus 222 in 2017. Home-sales operations improved from a $1.15 million loss to a $75,000 gain; gross profit percentage rose to 26% from 22%.
  • Cash flow: Operating cash flow was $40.2 million, slightly below $40.9 million. Investing activities used $137.6 million; financing activities provided $82.3 million. Cash, cash equivalents and restricted cash totaled $12.8 million at year-end, including $7.4 million of unrestricted cash.
  • Debt and liquidity: Year-end mortgage and loan principal totaled approximately $442.8 million before issuance costs (balance-sheet carrying amounts totaled approximately $439.1 million). Mortgages were predominantly fixed-rate, with a 4.3% weighted-average rate and 6.3-year weighted-average maturity. The company had $50 million drawn and $25 million available on its expanded $75 million unsecured facility, plus a potential $50 million accordion subject to conditions. It also reported $18.6 million available on home-sales and inventory credit lines.
  • Other balance-sheet data: Total assets were $879.0 million, total liabilities $454.3 million and shareholders’ equity $424.7 million. Marketable REIT securities were $99.6 million, with $32.0 million of margin borrowing secured by the portfolio.
  • Distributions: Common dividends remained $0.72 per share for the year. The filing characterized 2018 common distributions as entirely return of capital for tax purposes; preferred dividends totaled $20.3 million.

Material changes versus 2017

  • Rental growth, acquisitions, rent increases, higher occupancy and the expanded rental-home program supported higher total income and NOI. Most communities received rent increases of 3%–4%.
  • The portfolio grew through acquisitions and 905 additional rental homes. Investment property increased to $881.5 million from $764.4 million.
  • GAAP earnings changed sharply because newly adopted ASU 2016-01 required unrealized changes in equity securities to flow through current earnings. The $51.7 million 2018 fair-value loss contrasts with no such income-statement charge in 2017; it does not represent an equivalent cash outflow.
  • Marketable securities’ year-end fair value declined to $99.6 million from $133.0 million. Dividend income nevertheless rose 27% to $10.4 million.
  • The company issued $48.2 million net proceeds of Series D preferred stock and raised $35.1 million through its dividend reinvestment and stock purchase plan. Mortgage and loan balances increased.
  • Operating cash flow remained broadly stable, while investing cash use fell from $152.9 million to $137.6 million and financing cash provided fell from $130.6 million to $82.3 million.

Outlook, risks and unusual items

  • Management expects approximately $16 million of 2019 community renovation/capital improvements, excluding expansions and rental-home purchases. It planned to purchase approximately 800 rental homes in 2019 for about $36 million, including setup costs.
  • At year-end, the company had approximately 2,100 additional sites in varying stages of engineering or construction; completion timing and approvals are uncertain. It also had about 1,700 acres of undeveloped land.
  • Two communities with 1,187 sites were under purchase contract for approximately $45.3 million, with expected closing in the second or third quarter of 2019. Management stated it believed available cash, operating cash flow, financing and capital-market access would meet obligations over the next several years; this is not a guarantee.
  • Key risks include geographic and manufactured-housing concentration, occupancy and rent sensitivity, acquisition and redevelopment execution, variable-rate borrowing and refinancing, capital-market dependence, REIT qualification and distribution requirements, rent regulation, environmental and weather exposure, and market volatility in REIT securities.
  • The securities portfolio recorded a $40.2 million accumulated net unrealized loss at year-end. The company said it intended to hold the securities long term; however, market-value losses and margin financing remain material risks.
  • Other items: $525,000 of one-time payroll expense; a $251,680 oil-and-gas bonus was received in 2017, not 2018. Management reported no required real-estate impairment charges and no litigation expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Reconcile the $51.7 million securities fair-value charge, adoption-related accounting changes and resulting GAAP loss against recurring property operations and normalized FFO.
  • Review occupancy, same-property NOI, rent growth and lease-up progress at lower-occupancy and recently acquired communities.
  • Check debt maturities, credit-facility covenant headroom, variable-rate exposure, margin-loan collateral requirements and refinancing needs.
  • Assess cash available after capital improvements, rental-home purchases, acquisitions and common and preferred distributions; verify the company’s capacity to fund its growth plans without further dilution or leverage.
  • Monitor closing and financing of the $45.3 million contracted acquisitions, development approvals for vacant sites, and potential exposure from home repossession purchase commitments.