UMH Properties, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparison with the corresponding 2011 periods. UMH owns and operates manufactured-home communities, leases homes, sells and finances manufactured homes through a subsidiary, and invests in other REITs’ securities. At quarter-end, it owned 41 communities with about 9,000 developed homesites.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total income | $11.14 million | $9.61 million | $22.03 million | $18.62 million |
| Rental and related income | $8.91 million | $8.05 million | $17.67 million | $15.98 million |
| Manufactured-home sales | $2.24 million | $1.56 million | $4.37 million | $2.64 million |
| Net income | $2.02 million | $0.24 million | $3.77 million | $2.36 million |
| Net income attributable to common shareholders | $1.09 million | ($40,152) | $2.15 million | $2.08 million |
| Common earnings per share | $0.07 | $0.00 | $0.14 | $0.15 |
| FFO | $2.80 million | $1.34 million | $5.46 million | $4.85 million |
FFO is a non-GAAP supplemental measure; the filing cautions that it is not cash flow, net income, or a liquidity measure. The Q2 result included a $1.07 million gain on securities transactions and $535,855 of other income, primarily a payment for an oil-and-gas lease. Six-month securities gains were $2.28 million. The lease paid $499,471 upfront; it also provides a 20% royalty on production.
Operations and changes versus prior periods
- Rental income increased 11% in both Q2 and the first half, primarily from prior acquisitions and rental-home income. Occupancy rose from 77% at year-end 2011 to 78% at June 30, 2012.
- Manufactured-home sales rose, but sales operations remained loss-making after cost of sales and selling expenses: a $460,000 loss in Q2 (21% of sales) and a $732,000 loss for six months (17% of sales). Gross profit percentage was 8% in Q2 versus 5%; it was 7% for both six-month periods.
- Community operating expenses rose 12% in Q2 and the first half, mainly due to acquisitions and personnel costs. General and administrative expense rose 20% in Q2 and 25% for six months, mainly from compensation-related costs. Depreciation also increased, primarily with property acquisitions.
- Interest expense declined 16% in Q2 and 9% for six months, primarily reflecting debt principal repayments. Interest and dividend income increased 24% and 22%, respectively, as the securities portfolio grew.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $4.08 million, versus $4.37 million in 2011. Investing used $10.47 million, versus $22.61 million; financing provided $18.53 million, versus $20.50 million. Cash increased $12.13 million to $20.93 million.
- At June 30, cash was $20.93 million and available-for-sale securities were $55.27 million, up from $43.30 million at year-end. Total assets were $255.12 million, compared with $223.94 million at year-end.
- Mortgages payable were $95.70 million and loans payable were $8.98 million, for combined reported mortgage and loan balances of $104.68 million. Mortgages increased $5.42 million from year-end, while loans payable fell $14.97 million, largely as preferred-offering proceeds and new mortgage financing were used to pay down margin borrowing. Total liabilities were $109.73 million.
- Management reported $5 million available on an unsecured line and $6 million on revolving lines for home sales and inventory financing. Twenty-two of 41 properties were unencumbered. It stated that available sources were expected to meet obligations over the next several years.
- Cash dividends paid in the first half were $5.71 million on common stock and $1.62 million on preferred stock. The quarterly common dividend was $0.18 per share; Series A preferred dividends are cumulative at an annual rate of $2.0625 per share.
Capital, acquisitions and outlook
- In April, UMH issued 1.075 million shares of 8.25% Series A cumulative redeemable preferred stock, receiving about $25.8 million net. It also raised $9.87 million through its dividend reinvestment and stock purchase plan, including reinvested dividends.
- After quarter-end, UMH repaid a mortgage with an approximately $1.9 million balance; acquired a 123-site Ohio community for $3.4 million; and acquired 11 Pennsylvania and New York communities with 968 sites for $28.25 million. The latter acquisition was financed in part with a $13.98 million variable-rate mortgage at LIBOR plus 3%, maturing in 2017. Including these purchases, the company reported 53 communities and about 10,100 homesites.
- Management cited slowly improving economic conditions, increased community activity, rising home sales and demand for rental units. It added about 110 rental units since Q2 2011; rentals represented about 13% of occupied sites. UMH intends to pursue further property investments, but did not provide quantified earnings or occupancy guidance.
Risks, contingencies and unusual items
- The REIT securities portfolio had $9.84 million of net unrealized gains. Nine securities were temporarily impaired, with $621,543 of unrealized losses; management said it had the ability and intent to hold them for recovery. Securities values expose results and liquidity to market fluctuations.
- A February 2012 interest-rate swap fixed the rate on an $11.4 million mortgage at 4.39%; its $198,559 negative fair value was recorded as a liability and in other comprehensive income. Management determined the hedge was highly effective.
- Management identified risks including real-estate and economic conditions, occupancy and rents, acquisitions, interest rates, debt refinancing and covenants, access to capital, homebuyer financing, regulation, and continued REIT qualification. It reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether occupancy and rental growth continue, and whether newly acquired communities integrate and perform as expected.
- How manufactured-home sales and their reported operating losses develop, including the effect of inventory levels and buyer financing.
- The quality, concentration, volatility and impairment status of the REIT securities portfolio, and the sustainability of its income and realized gains.
- Post-quarter acquisition funding, variable-rate exposure, debt maturities and covenant capacity, alongside the cost and terms of future equity or debt financing.
- Whether the oil-and-gas lease generates production royalties beyond its upfront payment, and the continuing coverage of common and cumulative preferred dividends.