UMH Properties, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. UMH is a REIT focused on manufactured-home communities, with manufactured-home sales and financing and a portfolio of other REIT securities. At quarter-end, it owned 106 communities with approximately 19,300 developed sites.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total income | $26.45 million | $23.50 million |
| Rental and related income | $24.53 million | $21.79 million |
| Net income | $2.29 million | $1.91 million |
| Net loss attributable to common shareholders | $1.50 million; $(0.05) per share | $0.88 million; $(0.03) per share |
| Community NOI (non-GAAP) | $13.05 million | $11.23 million |
| Operating cash flow | $10.34 million | $7.66 million |
| Cash and cash equivalents | $8.31 million | $4.22 million at Dec. 31, 2016 |
| Total assets | $725.78 million | $680.44 million at Dec. 31, 2016 |
| Total liabilities | $400.85 million | $363.41 million at Dec. 31, 2016 |
Rental income increased 13%, while community operating expenses rose 9%; Community NOI increased 16%. The community operating expense ratio improved to 46.8% from 48.5%. Manufactured-home sales rose 12% to $1.92 million on 43 homes sold, but gross margin declined to 22% from 24%; sales operations recorded a loss of $446,000.
Investing cash outflow was $49.62 million, including $36.82 million for acquired communities. Financing cash inflow was $43.37 million, including borrowing and $14.45 million of net DRIP proceeds. Net cash increased by $4.09 million.
At March 31, mortgages payable were $309.0 million before issuance costs, and loans payable were $81.9 million. The company reported net debt to total market capitalization of approximately 36%, or approximately 26% after subtracting securities. Marketable REIT securities totaled $107.5 million, with $14.7 million of net unrealized gains. The filing reports $35 million outstanding on its amended $50 million unsecured revolving facility, which also has a conditional $75 million accordion feature.
Material changes and notable items
- UMH acquired five communities comprising 1,291 sites for approximately $36.5 million. Occupancy at acquisition ranged from 40% to 77%, averaging 63%.
- Same-property occupancy increased 180 basis points year over year to 81.9%; same-property NOI increased 12.6%. Rental-home occupancy was 93.7% at quarter-end, and the company added 243 rental homes during the quarter.
- General and administrative expense increased 30% to $2.20 million, primarily due to higher staffing and personnel costs. Depreciation increased 18% to $6.54 million, primarily reflecting acquisitions and additional rental homes.
- Preferred dividends of $3.79 million exceeded net income, resulting in a loss attributable to common shareholders. Preferred stock carries cumulative annual rates of 8.25% for Series A and 8.0% for Series B.
- The company adopted ASU 2017-01 prospectively and treated 2017 community purchases as asset acquisitions; approximately $300,000 of transaction costs were capitalized. The filing says adoption of two other accounting standards during the quarter had no material impact.
Outlook, risks and contingencies
- Management planned to add approximately 800 rental homes in 2017, as market conditions dictate, and expects to pursue community acquisitions and invest in improvements. It stated there is no assurance that suitable acquisitions, financing, or rental-home demand will continue.
- Management cited affordable-housing demand and expected operating-expense ratios to benefit as occupancy grows, while noting recently acquired communities may require above-normal deferred-maintenance spending.
- Risks include changes in occupancy and rental rates, interest rates, refinancing and covenant compliance, access to capital, acquisition competition and integration, manufactured-home buyer financing, securities-market changes, and maintaining REIT tax status.
- UMH has agreed to buy certain homes repossessed by 21st Mortgage following borrower defaults. Related loan balances were approximately $5 million under the current agreement and $4 million for homes in previously acquired communities. These are potential obligations, not reported debt balances.
- The company reported no material litigation, no off-balance-sheet arrangements, no material change in risk factors, and effective disclosure controls. It declared a common dividend of $0.18 per share for payment in June 2017.
Key facts for investors to verify
- Whether acquired communities’ initial occupancy levels improve and whether the company achieves its rental-home expansion plans and occupancy targets.
- Acquisition returns relative to financing costs, including the pace of capital spending and deferred maintenance at recently purchased properties.
- Debt maturities, revolving-facility availability, interest-rate exposure, and the effects of leverage and refinancing on liquidity.
- Performance and market-value volatility of the $107.5 million REIT securities portfolio, including its contribution to dividend income and liquidity.
- The sustainability of common and preferred dividends given the common-shareholder loss and ongoing acquisition and investment needs.
- Potential losses or cash requirements under home-repurchase agreements and the collectability of notes and other receivables.