UMH PROPERTIES, INC. quarterly report, Q2 FY2011

UMH Properties, Inc. — Q2 2011 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. UMH is a REIT operating manufactured-home communities and home sales/financing businesses, and also invests in other REITs’ securities. It owned 38 communities with approximately 8,744 sites at period-end.

Financial performance

MetricQ2 2011Q2 2010Six months 2011Six months 2010
Total income$9.61 million$7.86 million$18.62 million$16.02 million
Net income$236,000$1.47 million$2.36 million$3.36 million
Net income attributable to common shareholders$(40,000)$1.47 million$2.08 million$3.36 million
Basic/diluted earnings per common share$0.00$0.12$0.15$0.27
Cash provided by operating activitiesNot provided quarterlyNot provided quarterly$4.37 million$2.76 million

Q2 total income rose 22% and first-half income rose 16%, largely reflecting prior-year community acquisitions. Rental and related income increased 19% in both comparisons. Expenses rose 26% in Q2 and 19% for the first half; community operating costs, depreciation, and general and administrative expenses were among the increases. Interest expense rose 22% in Q2 and 20% for the first half. First-half net income declined despite higher revenue, with lower interest and dividend income and lower securities transaction gains contributing.

Manufactured-home sales were $1.56 million in Q2, up 43%, and $2.64 million for the first half, up 4%. Sales operations remained loss-making: $407,000 in Q2 and $690,000 for the first half, after cost of sales and selling expenses. Community operations income increased to $3.68 million for Q2 and $7.38 million for the first half.

The securities portfolio generated first-half net realized gains of $1.54 million, versus $1.68 million a year earlier. Its June 30 fair value was $36.62 million, including $5.74 million of net unrealized gains; five securities were temporarily impaired, with reported unrealized losses of $162,000. The portfolio’s weighted-average yield was approximately 7%.

Financial position, cash flow, and capital

  • Total assets were $211.43 million at June 30, 2011, up from $188.78 million at December 31, 2010. Cash and cash equivalents were $7.92 million.
  • Mortgages payable were $95.40 million, versus $90.82 million at year-end; other loans payable were $3.38 million, down from $22.24 million. Of mortgage balances, $76.29 million was fixed-rate and $19.11 million variable-rate; all loans payable were variable-rate.
  • First-half operating cash flow was $4.37 million. Investing activities used $22.61 million, including $13.30 million for three Tennessee communities and $9.73 million of securities purchases. Financing activities provided $20.50 million. Ending cash increased by $2.26 million to $7.92 million.
  • In May, UMH issued 1,338,800 shares of 8.25% Series A cumulative redeemable preferred stock, raising $31.86 million net. Proceeds funded acquisitions and debt repayments. The filing reports $33.47 million liquidation value of preferred stock at June 30.
  • Management reported approximately $5 million available on an unsecured credit line, $10 million available on a revolving line, and inventory-financing facilities totaling $5 million, of which $672,000 was used. Securities were encumbered by approximately $3 million in margin loans. Seventeen of the 38 properties were unencumbered.

Material developments, outlook, and risks

  • On June 29, UMH acquired three Tennessee communities comprising 693 sites on 209 acres for $13.3 million. Average occupancy was approximately 73%. The company also added about 100 rental units to selected communities, excluding acquired units.
  • Management said demand for rental units had increased as conventional homeownership declined, but economic weakness, unemployment, and customers’ difficulty selling existing homes continued to hurt manufactured-home sales and profitability. Occupancy excluding the flooded Memphis community was approximately 78%.
  • Memphis Mobile City, a 157-site community, was evacuated after severe flooding in May 2011. Management anticipated reopening but had made no final decision; the community’s net book value was approximately $1 million. A purported class-action lawsuit alleging discrimination and consumer-protection violations related to the community had been filed but not served. UMH disputed the claims and said its insurer was supporting the defense.
  • A mortgage of approximately $4.6 million was due in December 2011. Management was pursuing refinancing or an extension and expressed optimism. It believed operations, the DRIP, credit availability, and property financing/refinancing would meet obligations over the next several years; this depends on access to capital and successful refinancing.
  • Management intended to pursue further acquisitions but cautioned that opportunities may not arise or be available on acceptable terms. Risks include occupancy and rent levels, economic and real-estate conditions, interest rates, debt covenant compliance and refinancing, financing access, home-buyer financing, and maintaining REIT tax status.
  • The board declared a common dividend of $0.18 per share and a preferred dividend of $0.55 per share for payment September 15, 2011, subject to the stated record dates. The filing reported no material change in market-risk disclosures, no material change in internal controls, and no off-balance-sheet arrangements.

Important facts for investors to verify

  • FFO discrepancy: The MD&A narrative states Q2 and first-half FFO of $1.61 million and $5.13 million, respectively. The filing’s FFO reconciliation table instead calculates $1.34 million and $4.85 million after preferred dividends. Confirm the intended figures and methodology.
  • Track the December 2011 mortgage refinancing, the status and operating impact of Memphis Mobile City, and any material developments in the related litigation.
  • Assess acquired-community occupancy and integration, ongoing home-sales losses, and the sustainability of operating cash flow and dividends.
  • Monitor the securities portfolio’s concentration, unrealized gains and impairments, margin borrowing, and sensitivity to market prices and interest rates.