UMH Properties, Inc. — 2016 Second-Quarter 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. UMH is a REIT that owns and operates manufactured-home communities, rents and sells homes, and invests in other REIT securities. At quarter-end it owned 98 communities with approximately 17,800 developed sites.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total income | $25.21 million | $19.55 million | $48.72 million | $37.90 million |
| Rental and related income | $22.42 million | $17.94 million | $44.21 million | $35.15 million |
| Net income | $3.05 million | $0.20 million | $4.96 million | $0.92 million |
| Net loss attributable to common shareholders | $(0.68) million | $(1.69) million | $(1.57) million | $(2.86) million |
| Common loss per share | $(0.03) | $(0.06) | $(0.06) | $(0.11) |
| Community NOI | $11.71 million | $8.80 million | $22.94 million | $17.20 million |
| Operating cash flow | Not presented by quarter | $11.69 million | $10.25 million |
Community NOI increased 33% in both the quarter and first half. The community operating expense ratio improved to 47.8% from 51.0% for Q2 and to 48.1% from 51.1% for the first half. Manufactured-home sales rose 72% in Q2 and 64% in the first half; the home-sales gross margin was 22% in Q2 versus 23% and 23% for both first-half periods. Management’s non-GAAP FFO attributable to common shareholders was $5.04 million for Q2 and $9.66 million for the first half; normalized FFO was $4.26 million and $8.65 million, respectively. These non-GAAP measures are not substitutes for GAAP results or cash flow.
At June 30, total assets were $652.0 million, cash was $9.6 million, and securities available for sale were $103.9 million. Mortgages, net of issuance costs, were $286.6 million and loans payable were $45.3 million. Total liabilities were $344.7 million and shareholders’ equity was $307.3 million. First-half investing cash outflow was $36.5 million and financing cash inflow was $27.9 million.
Material changes and notable items
- Income growth chiefly reflected 2015 acquisitions, higher rents, improved same-property occupancy, and more rental homes. Same-property occupancy rose 180 basis points year over year to 84.2%; same-property NOI increased 21.4%.
- UMH added 410 rental homes in the first half. Management reported rental-home occupancy of 94.4% at June 30 and approximately 4,100 rental homes in its overview; another section cites approximately 3,900 occupied rental homes. Investors should note the filing’s differing home-count descriptions.
- Depreciation increased 28% in Q2 and 29% in the first half, primarily from acquired properties and rental-home additions. Interest expense rose 15% and 24%, respectively, as average borrowings increased.
- REIT securities increased to $103.9 million, up 39% from year-end, including a $18.4 million first-half improvement in unrealized value. First-half realized securities gains were $1.01 million; Q2 gains were $0.78 million. These investment-related gains and unrealized changes contributed to reported results and comprehensive income.
- In April, UMH issued 2.0 million Series B preferred shares at $25.50 per share, receiving approximately $49.1 million net. Preferred dividends were $6.52 million for the first half, contributing to common shareholders’ GAAP loss despite positive net income.
- New fixed-rate mortgages included $7.2 million at 4.3% and $8.3 million of Freddie Mac financing at 4.32%–4.38%; proceeds refinanced loans averaging 6.66%. Mortgage debt increased about $3.5 million while loans payable declined about $12.5 million.
Outlook, risks, and contingencies
Management said it expects to add up to 800 rental homes during 2016 as market conditions dictate, expects affordable-housing demand to support rental and sales prospects, and intends to pursue community acquisitions and property improvements. It gave no formal earnings or financial forecast and cautioned that acquisition opportunities and rental demand are not assured. Management stated that available funds should be adequate for obligations over the next several years.
Liquidity included $20.0 million available on an unsecured credit facility, with a potential additional $15 million accordion, $6.0 million on a home-sales credit line, and approximately $14.1 million on inventory facilities. Securities were partly encumbered by a $12.9 million margin loan. Management cited risks including real-estate market conditions, competition, occupancy and rent levels, interest rates, refinancing and covenant compliance, access to capital, homebuyer financing and securities-market movements.
Potential home-repurchase exposure under agreements with 21st Mortgage related to approximately $4.5 million of loans, plus approximately $5.3 million of loans from communities previously acquired. UMH also purchased approximately $2.08 million of customer loans through its Triad program in the first half. Management said ordinary-course claims and litigation were not expected to materially affect results; the filing reported no legal proceedings. UMH reported no off-balance-sheet arrangements and no material changes to risk factors.
Important facts for investors to verify
- Reconcile reported rental-home totals and occupancy counts, and monitor same-property occupancy, NOI, and expense ratios.
- Assess whether operating cash generation and available credit can support distributions, investment, debt service, and planned rental-home additions.
- Review the size, concentration, volatility, and liquidity of the REIT securities portfolio, including the effect of unrealized gains and margin borrowing.
- Evaluate preferred-dividend obligations and the impact of additional preferred and common shares on common shareholders’ results and per-share value.
- Track contingent home-repurchase obligations, borrower defaults, refinancing needs, and the company’s ability to maintain financing access and debt-covenant compliance.