UMH Properties, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. UMH owns and operates manufactured-home communities and also rents, sells and finances homes. At quarter-end it operated 92 communities with approximately 15,700 developed homesites across seven states.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total income | $19.55 million | $18.15 million | $37.90 million | $34.00 million |
| Rental and related income | $17.94 million | $15.77 million | $35.15 million | $30.62 million |
| Community NOI | $8.80 million | $7.43 million | $17.20 million | $13.99 million |
| Net income | $0.20 million | $1.48 million | $0.92 million | $2.04 million |
| Net loss attributable to common shareholders | ($1.69 million) | ($0.41 million) | ($2.86 million) | ($1.73 million) |
| GAAP diluted loss per common share | ($0.06) | ($0.02) | ($0.11) | ($0.08) |
| FFO / Normalized FFO | $2.84 million / $3.10 million | $3.21 million / $2.51 million | $5.89 million / $6.32 million | $5.35 million / $4.42 million |
Community NOI, defined as rental and related income less community operating expenses, rose 18% in Q2 and 23% in the first half. Calculated NOI margin on rental and related income was approximately 49.1% in Q2 2015 versus 47.1% in Q2 2014, and 48.9% versus 45.7% for the first half. Manufactured-home sales gross margin was 23% for both the Q2 and first-half 2015 periods, versus 18% and 20%, respectively, in 2014. Home sales operations nevertheless reported losses after selling expenses.
First-half operating cash flow was $10.25 million, compared with $7.95 million a year earlier. Investing cash outflow was $37.15 million and financing cash inflow was $27.85 million; cash increased $0.95 million to $9.03 million. At June 30, total assets were $506.0 million. Mortgages payable were $224.3 million and loans payable were $64.9 million, for combined stated borrowings of approximately $289.2 million. Securities available for sale were $63.3 million. Available liquidity also included stated undrawn facilities: $5 million on an unsecured credit facility, $6 million on home-sales revolving lines and approximately $10.4 million on an inventory facility; a further $15 million accordion capacity was potentially available.
Material changes versus prior comparable periods
- Rental income growth reflected property acquisitions, higher occupancy and rental-home income. Overall occupancy increased to 82.0% from 81.7%; same-property occupancy rose to 83.4% from 82.5%. Rental homes reached approximately 2,900, with 95% occupancy.
- Community operating expenses rose 10% in Q2 and 8% in the first half, principally due to acquisitions; they included a one-time $125,000 settlement payment related to the Memphis litigation.
- Interest expense increased 28% in both the quarter and first half, primarily because average borrowings increased with acquisitions. Management reported a 4.6% weighted-average interest rate at June 30, 2015, versus 4.8% a year earlier.
- Common-shareholder losses widened despite higher rental income and NOI, reflecting higher interest and depreciation expense and lower gains on securities sales. First-half net income also fell year over year.
- Investment securities produced a first-half net unrealized loss of approximately $1.72 million; Q2 comprehensive loss was $7.01 million, mainly reflecting unrealized investment losses.
Outlook, commentary, risks and unusual items
- Management planned to add rental homes during 2015 as demand warranted, citing strong rental-home demand and approximately 2,800 potential vacancies. It identified the Marcellus and Utica shale regions as areas of anticipated demand and acquisition focus.
- UMH had a definitive agreement to buy six communities with approximately 2,200 sites for about $68.6 million, subject to due diligence and customary closing conditions; it anticipated closing in Q3 or Q4 2015. The filing provides no formal earnings or revenue guidance.
- During the first half, the company acquired four communities for an aggregate $12.617 million. It also incurred approximately $89,000 in debt-extinguishment cost associated with a mortgage repayment.
- Management said available funds should be adequate to meet obligations over the next several years. Key stated risks include occupancy and rental rates, acquisitions and integration, interest rates, refinancing and debt covenants, access to capital, manufactured-home buyer financing and repossessions, securities-market conditions, and maintaining REIT tax qualification.
- Under agreements with 21st Mortgage, UMH may have to purchase repossessed homes. At June 30, 102 transactions had original loan balances of approximately $4.9 million; additional obligations tied to loans on communities previously acquired had balances of approximately $2.6 million. The filing does not quantify a likely loss under these arrangements.
- The Memphis Mobile City class-action matter was settled; UMH paid $125,000 to its insurer and reported no further liability. A new community at the site was under construction, with an expected cost of approximately $5.4 million.
- Quarterly dividends declared for September payment were $0.18 per common share and $0.515625 per Series A preferred share. The preferred stock carries an 8.25% cumulative annual dividend.
Most important facts for investors to verify
- Whether the planned $68.6 million community acquisitions closed on the expected timetable, and their financing, occupancy and contribution to results.
- Whether occupancy, same-property NOI and rental-home occupancy continued to improve, and whether growth reflects existing properties or acquisitions.
- Debt maturities, interest-rate exposure, covenant headroom and actual availability of the stated credit facilities and accordion capacity.
- The sustainability of operating cash flow and common and preferred dividends relative to acquisition, development and debt-service needs.
- Performance and concentration of the REIT securities portfolio, including unrealized losses and the company’s ability and intent to hold impaired securities to recovery.
- Potential exposure from the 21st Mortgage repossession-purchase agreements and costs or progress of the Memphis redevelopment.