UMH Properties, Inc. — Q3 2014 Form 10-Q
Business and period: Manufactured-home community owner and operator, with home rentals, sales and financing, and investments in other REIT securities. This unaudited report covers the quarter and nine months ended September 30, 2014; comparisons are with the same periods in 2013. At quarter-end, UMH owned 88 communities with approximately 15,100 developed homesites.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total income | $18.55 million | $16.25 million | $52.55 million | $45.78 million |
| Rental and related income | $16.36 million | $13.99 million | $46.97 million | $39.39 million |
| Manufactured-home sales | $2.20 million | $2.26 million | $5.58 million | $6.39 million |
| Net income | $0.63 million | $0.80 million | $2.67 million | $6.57 million |
| Net income (loss) attributable to common shareholders | $(1.26) million | $(1.09) million | $(2.99) million | $0.90 million |
| FFO attributable to common shareholders | $2.71 million | $1.90 million | $8.06 million | $9.35 million |
| Core FFO excluding securities-sale gains | $2.84 million | $1.88 million | $7.26 million | $6.52 million |
Rental income rose 17% for the quarter and 19% year to date, chiefly reflecting acquisitions and growth in rental homes. Same-store occupancy rose to 83.3% from 81.3%; total occupancy was 82.2%, including recently acquired communities. Rental units increased to 2,207 from 1,628 year over year, with 91.3% occupancy. Home-sale gross margin improved to 24% from 18% for the quarter and to 21% from 16% year to date, but higher selling expenses left sales operations loss-making: $0.34 million for Q3 and $1.14 million year to date.
Interest expense increased 29% in Q3 and 31% year to date, primarily due to higher debt balances following acquisitions. The weighted-average interest rate was 4.8%, compared with 4.4% at September 30, 2013. Nine-month securities-sale gains declined to $1.27 million from $3.79 million, contributing to lower reported net income and FFO year to date. Core FFO excluding those gains increased year over year.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $14.51 million, versus $3.71 million; investing cash outflow was $44.31 million, versus $92.42 million; financing cash inflow was $24.84 million, versus $85.45 million.
- Cash was $2.66 million at September 30, 2014, down from $7.62 million at year-end 2013. Available-for-sale REIT securities were $62.37 million, with $2.57 million of net unrealized gains.
- Total assets were $466.10 million, up from $407.98 million at year-end. Mortgages payable were $183.86 million and loans payable $72.35 million, together approximately $256.21 million. Shareholders’ equity was $201.00 million.
- Management reported $8.9 million available on revolving lines for home sales and inventory financing; 28 of 88 properties were unencumbered. The Ocean First $10 million revolving line was fully utilized at quarter-end.
- UMH acquired 14 communities with 1,612 homesites for $42.55 million during the first nine months. It issued approximately $23.12 million of common stock through its DRIP and paid $11.97 million in common dividends and $5.67 million in preferred dividends.
Outlook, risks and unusual items
Management cited a moderate economic recovery and increased community activity, and plans continued community acquisitions and rental-unit additions as demand warrants. It identified energy-rich Marcellus and Utica shale areas as acquisition priorities and said current liquidity sources and expected cash generation should meet obligations over the next several years. No specific earnings or financial guidance was provided.
Home sales remain pressured by tighter government-related lending standards; UMH is emphasizing rentals and investing in retail sales centers. Management also cited acquisition integration, occupancy and rent levels, access to capital, interest rates, debt refinancing and covenant compliance, homebuyer financing, securities-market volatility, natural disasters, and REIT qualification among the risks. A discrimination and consumer-protection lawsuit concerning Memphis Mobile City remains ongoing; the company says it believes the case lacks merit and its insurer is supporting the defense. UMH also agreed to repurchase certain repossessed homes financed through 21st Mortgage; 47 transactions totaling approximately $2.2 million in original loan amounts were covered at quarter-end.
Subsequent events include a planned Pennsylvania community purchase for approximately $3.8 million, expected to close in Q1 2015 subject to due diligence; a new agreement allowing financing for up to 500 rental units at 6.99%; and a $4 million loan secured by MREIC shares at 4.625%, obtained October 30, 2014. Controls were reported effective, with no material changes to internal controls or risk-factor disclosures.
Key facts for investors to verify
- Whether rental-income and occupancy growth persists, particularly at recently acquired communities and in the expanding rental-home portfolio.
- Whether home-sales investments and retail centers improve sales-operation profitability despite financing constraints.
- Debt maturities, variable-rate exposure, revolving-line availability, and the effect of continued acquisition financing on interest costs and liquidity.
- The quality, concentration, and market value of the REIT securities portfolio, including the reported temporary impairments.
- Developments in the Memphis Mobile City litigation and potential obligations under the home-repurchase agreement.
- Whether the proposed 2015 acquisition and rental-unit financing proceed on the disclosed terms.