UMH Properties Inc (UMH) 2013 Q4 法說會逐字稿

Good morning and welcome to the UMH Properties Inc. fourth-quarter and year-end 2013 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

It is now my pleasure to introduce your host, Miss Susan Jordan, Director of Investor Relations. Thank you Miss Jordan. You may begin.

Thank you very much, operator. I would like to remind everyone that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company's annual 2013 earnings release and filing with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements.

Having said that, I'd like to introduce management with us today. Eugene Landy, Chairman; Samuel Landy, President and Chief Executive Officer; and Anna Chew, Chief Financial Officer. It is now my pleasure to turn the call over to UMH's President and Chief Executive Officer, Samuel Landy.

Thank you very much, Susan. Good morning, everyone, and thank you for joining us. We are pleased to report our results for the year ended December 31, 2013.

UMH has made substantial progress in growing our portfolio and increasing the value of our company. During 2013, we acquired 17 communities containing approximately 2700 developed homesites for a total purchase price of $88.3 million. This represents a 27% increase in total homesites over the prior year. Additionally, over the past four years, we have doubled our portfolio by acquiring 46 communities totaling 6600 developed homesites. Our portfolio is now comprised of 74 communities with 13,500 developed homesites in seven states.

We have opportunistically executed our growth strategy as prices for communities have recently risen substantially. We have achieved this growth by strategically purchasing communities in our target markets where we now have greater economies of scale. It is anticipated that these locations will benefit from above average growth rates as a result of the abundant energy resources contained in our regions. Additionally, we have entered into definitive agreements to purchase 12 communities with a total of 1300 developed homesites for a purchase price of approximately $37 million.

We are continuing to build our acquisition pipeline and are in various stages of negotiations for a number of community acquisitions. Our growth strategy is to purchase communities in strong geographic areas, make appropriate capital improvements, ad sales staff and marketing, and thereby increase income and occupancy. We believe our business plan will increase the value of these communities dramatically.

We anticipate adding an additional $100 million in communities over the next few years. While community acquisitions often require additional investments in time and capital to bring these communities up to our highest standards, we are confident that these acquisitions will have a favorable impact in delivering long-term value to our shareholders.

Interest rates have come down substantially, and this has allowed us to achieve investment spreads that will be meaningfully additive to our earnings going forward.

UMH's overall occupancy rate was 80.5% at the year-end 2012, 81.7% in the third quarter of 2013, and 81.1% at the year-end 2013. The slight drop in the fourth quarter was due to new vacant sites coming online and a temporary turnover in rental homes. We have currently improved our occupancy to 81.8%.

Applications for residency to buy or rent have also continued to increase. We currently have the potential to fill 2700 vacancies. Housing demand in the energy-rich Marcellus and Utica Shale regions, where numerous UMH communities are located, is expected to be particularly strong in the years to come. Based on the increases in traffic we are seeing, the potential for continued occupancy improvements is high heading into 2014.

And now, Anna will provide you with greater detail on our results for the quarter and for the year.

Thank you Sam. Core funds from operations were $1.1 million, or $0.05 per diluted share, for the full year 2013, compared to $1.7 million, or $0.10 per diluted share, for the fourth quarter of 2012. Included in core FFO for the fourth quarter are additional expenses relating to installation of a new computer software system, pension costs for an executive of retirement age, and deferred maintenance at newly acquired communities.

For the full year 2013, core FFO was $11.4 million, or $0.61 per diluted share, compared to $10 million, or $0.62 per diluted share, in 2012. Core FFO, excluding securities gains, was $825,000, or $0.04 per diluted share, for the recent quarter compared to $1.1 million, or $0.06 per diluted share, a year ago. For the full year 2013, core FFO, excluding securities gains, was $7.3 million, or $0.39 per diluted share, compared to $5.9 million, or $0.36 per diluted share, in the prior year, an increase of 8.3% on a per-diluted share basis.

Rental and related income for the quarter was $14.1 million compared to $10.5 million a year ago, an increase of 34%. For the full year 2013, rental and related income was $53.5 million compared to $38 million for 2012, an increase of 41%.

Our community operating expenses for the quarter were $8.7 million compared to $5.6 million a year ago, representing an increase of 55%. For the full year 2013, community operating expenses were $29.1 million compared to $20.6 million for 2012, an increase of 41%. As previously mentioned, our community operating expenses for the quarter and for the year included costs such as additional repairs and maintenance, tree removal, and removal of homes associated with bringing our newly acquired communities up to our high standards.

In 2013 we removed over 200 obsolete homes from our communities at an estimated cost of $1 million. These expenses will decrease as we complete the process of upgrading these communities, which include adding rental homes and creating new sales centers.

Income from community operations amounted to $5.4 million for the quarter compared to $4.9 million a year ago, representing a 10% increase. For the full year, income from community operations amounted to $24.3 million compared to $17.4 million for 2012, representing a 40% increase. This increase was due to the additional income related to 34 communities purchased during 2012 and 2013.

Our sales remained relatively stable year-over-year. However, we have reduced our loss from the sales operations, including interest expense, by 44% to $166,000 for the fourth quarter of 2013, and by 55% to $640,000 for the year. This loss does not take into consideration allocation of corporate overhead. Over the next year, we intend to return our home sales position to profitability.

UMH's communities are well-positioned to begin a broad marketing campaign that we hope will increase earnings in 2014. Additionally, we opened two sales centers during 2013. By the end of this year, we should have four well-located retail sales centers that can sell homes both inside and outside of our communities. Setting these sales centers up and staffing them requires a capital investment, but we believe these sales centers have the potential to generate positive results going forward.

As of year-end, our capital structure consisted of approximately $210 million in debt, of which $161 million was community level mortgage debt, and $49 million were loans payable. We have taken advantage of the low interest rate environment, and reduced our weighted average interest rate on our mortgage debt from 5.2% at year-end 2012 to 4.5% currently. 94.8% of our mortgage debt is fixed rate. We also had a total of $92 million in perpetual preferred equity at year-end. Our preferred stock, combined with an equity market capitalization of $195 million and our $210 million in debt, gives us a total market capitalization of approximately $497 million at year-end.

From a credit standpoint, our net debt to total market capitalization was 41%, our fixed charge coverage was 1.7 times, and our total debt to EBITDA was 8 times.

From a liquidity standpoint, we ended the year with $7.6 million in cash and cash equivalents and $15 million in availability under our credit facility with an additional $15 million potentially available to fill into an accordion feature. Subsequent to year-end, we drew down an additional $10 million to fund our upcoming acquisitions. We also had $13 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $59.3 million in marketable REIT securities encumbered by $18.6 million in margin loans at 2% interest. Generally, 50% may be borrowed on margin. At the end of the year, we had $1.1 million in net unrealized gains on our securities investments in addition to the $4.1 million in total gains realized during 2013.

And now we would be happy to take your questions.

(Operator Instructions). Brian Hollenden, Sidoti and Company.

Good morning guys, and thanks for taking my call. Generally how much capital do you put into a property upfront after the acquisition? And sort of how long do these elevated costs last for before normalizing?

Sure. Sam Landy here. It varies by community, and when you purchase a portfolio of communities, say six out of seven could be in relatively good shape, but the seventh could require substantial work. To give you -- we have specific examples of communities where the revenue one year after we acquired them was equal to the expenses, so the expenses were 100% of revenue in the year of acquisition, but there is a purpose to that and eventually those expenses will fall. Normally, expenses are under 50% of revenue, maybe even 40% of revenue. UMH operates 32 communities with expenses under 50% and 43 communities with expenses over 50%.

In the acquisitions, when I look at it, $2.4 million of our expenses the past year will not be reoccurring for the communities we already own. But on the communities we purchase, some of those are going to need substantial additional repairs and maintenance or capital costs. And I could be really specific for you, if you would like us, to what those expenses are.

Let's go to the next question.

Can you give us an idea of how many of your communities have a sales center, and then what the goal looks like in terms of you mentioned that the plan is to add additional sales centers, both on communities and off-site of the communities?

Let me answer that. The manufactured housing industry has changed dramatically since I started in it 40 years ago. Previously, you had manufacturers and the manufacturers had dealers, and we owned the communities and the communities were surrounded by sales centers, and the sales centers were very profitable and the manufacturers were very profitable. And in particular years, they had they had 15% of the housing market. Some years they sold 200,000, 250,000, 350,000 homes.

We still believe in the manufactured housing industry. We believe that manufacturing homes in factories is the best way to build them. You build them soundly, you build them less expensively, and we believe there's tremendous need for our product. Even though the industry has gone from 250,000, 350,000 homes down to 50,000, and we've only recovered the 62,000, UMH still believes in the industry and believes it will recover to the 150,000, 250,000.

The question is, though, who will sell these homes if the dealers are gone? The regulatory barriers have increased dramatically, and so we think it's natural for the community owners, particularly the big community owners that owns 15,000, 20,000 or 100,000 homes, to have the sales centers. So where we are gearing ourselves up to sell. Right now we sell, if we own 78 communities, we sell in each community. It's a very expensive way to do it, and personnel-wise it's very difficult to do, to have the people who are trained to be in sales to be in each location. So, we are thinking of moving to a model in which we have regional sales centers in the individual parts, then refer the customer to the regional center. And we are actually going out and we are buying parcels of land that historically were once regional sales centers run by other people that we know sold as many as $20 million in homes in particular centers. And we are going to open three or four of those centers. And we are trying to consolidate our sales operation so we don't sell at each part, but we have one part that has the sales operations of three or four.

And if you look at what we've done in acquisitions, we have now reached scale in that we have communities, 15, 20 miles apart, and we have numerous communities, and we think we can successfully execute the strategy. Now, we need the housing business to be good, and as you know, most commentators think the housing business is going to be good in 2014 and maybe for a decade after that.

Thank you for that explanation. It's very helpful. Just following up with another question, with prices elevated a little bit, at what cap rates do you kind of view acquisitions as too expensive?

We are looking at Florida and we haven't figured how to do Florida yet because cap rates down there are many sub 6%, and even though we can borrow at 4%, 4.5%, when you get into the all the work you have to do to take the older homes out, that hasn't quite worked. But we have been trying to buy homes or parks at 7.5% cap rate, and we hope to borrow at 4.5%. And again, we hope to get in that cap rate, we hope to buy parks that have 20%, 25% vacancies. So we basically get the vacant sites for a much lower price. I won't say we get them for nothing, but if we are able to fill the parks, the cap rates will certainly improve.

To date, we are very happy with our acquisitions and we think our strategy will work. The competition, though, has certainly multiplied. I recently counted nine major organizations out buying manufactured home communities at substantial size and scale. So there's really a lot of competition.

So what we are doing right now is we are leaning to buying parks that are in our area and may be somewhat smaller than our competition wants. And so they can't be bothered with making a $12 million acquisition of how many parks?

Four parks --

-- four parks for $12 million. And because it's right in our backyard and we have the ability to run it and we know the area very well, and as Sam pointed out, we are very bullish on the Marcellus and Utica Shale in Pennsylvania and Eastern Ohio. We think those areas are going to do better than the country. We think the country will do very well but we think those areas will do even better. So we are concentrating on these smaller acquisitions. And so far, we are executing that strategy successfully.

Thank you. And just one final question and I'll turn the call over. Do you have a general forecast for occupancy by the end of 2014, or kind of where you see occupancy ticking up toward by the end of the year?

I don't think we give numbers in advance, and there's good reason for that. We are hoping that the spring selling season comes back to what I call normal, which is seven years ago. It hasn't been that good for seven years, but we are hoping for a resurgence in sales and increased occupancy.

The basic point with UMH is we have 2700 vacant sites?

Correct.

2700 vacant sites. Historically, and again, I've been around a long time, but for decades, the manufactured housing communities were full. And the situation where you have 70% occupancy or 65% occupancy is unusual. There's always been a shortage of affordable housing, even in the poor cycles. So, this is an unusual cycle. It's longer and deeper. It's the worst housing cycle I have ever seen. And now we think we are going to recover from that and go back to normal so that we think these parks will be full. And if you get to 2700 sites occupied, on the top line, you're going to pick up $10 million. And we don't think that's an out of the ballpark projection. We think that eventually these parks will be full again.

If I could add a couple of things to that, same-store occupancy was up 80 units for the year. And the purpose of these increased expenses we made during the past year are to bring new communities up to the standards that people will want to occupy them.

There's a particular acquisition we are working on right now where right next to the acquisition they are building a 300 space apartment complex, yet the acquisition is sitting with only about 60% occupancy and the owner doesn't really understand why. Well, people are not moving into a place that had 10 years of deferred maintenance. So when we acquire it, we are going to make that -- we're going to repair that deferred maintenance right away. That's the expense.

One of our expenses the past year was $77,000 for security to enforce rules and regulations because sometimes it's not so easy to take a community that's become rundown and upgrade it. But when we do that, what we have seen at UMH is 22 of our communities grew revenue over 6%, seven communities grew revenue 10% or more, and five communities grew revenue over 15%. So our formula works. We know that when you get the community to the right quality, they will operate at a 40% to 50% expense ratio year after year, but the first thing to do is put them in a quality that people want to buy homes and rent homes, and that's what will increase the occupancy.

Thank you very much. I appreciate it.

Bruce Winter, a private investor.

Yes, thank you. Could you please discuss your financing options for your growth strategy of about $100 million of acquisitions, New sales center openings, fixing the deferred maintenance? I know you have a dividend reinvestment program; you get so much every year out of that. You can leverage that. In some years you have issued common stock, preferred stock, and you've also taken money out of your securities portfolio. In some years, you put money into your securities portfolio. So how do you see that playing out in the next few years?

I don't want to take Anna's turn but I do want to tell you that the company is very well capitalized. We have, on replacement costs, maybe $500 million in parks. And what do we have in mortgage debt?

We have about $160 million in mortgage debt and about $50 million in loans payable.

We only have $210 million in park debt. We have, today, we have about $62 million in securities less the $18 million loans, we have $44 million. So we are very well capitalized.

We discussed internally, if we have to buy 250 homes for, what would that be, Sam, $10 million?

$10 million.

$10 million. The only decision we want to make is if someone says we can finance it with a certain company, or we can try to do it out of capital. And to date, we have doing it out of capital but we could just as well do it out of -- borrow the $10 million on the homes we want to buy.

So we are very fortunate that we have a strong balance sheet. Sam was talking about the previous owners. In defense of the previous owners of these parks, they couldn't do what we want to do. They didn't have the money to put $1 million worth of homes in and they don't have the $1 million to fix up the park. And in this mortgage market, they were not able to finance it, whereas we can by the parks from existing owners and make these investments. So what are the -- (multiple speakers)

I know you have a strong balance sheet, and it's no problem. I'm just wondering. Are you going to issued common stock, deferred stock? Are you going to borrow the money? And how much a year do you get out of your dividend reinvestment program?

Anna had that in the report? $35 million?

$35 million out of the dividend reinvestment and shareholder investment program.

Which is more than enough. We have not raised a lot of money because we did those wonderful acquisitions. We did $69 million in the portfolio. We did hundreds of millions in acquisitions. Even though we still think we can make acquisitions, we do recognize that the pace of the acquisitions is slowing down. And so we assume that if we finance $50 million in acquisitions, there will be $30 million, $35 million in debt on them and we will need $10 million or $15 million, which as you know, we're a small company. That's a respectable amount of money, but we can raise that amount of money. So we will continue to use the dividend reinvestment shareholder investment plan, but we've cut it back recently and we are thinking about cutting it back even more. So because if we need $10 million, $15 million, that's what we are going to raise. We are not going to raise $35 million. And we're going to continue to look at other sources to borrow money. We really want to get a -- continue with a strong balance sheet, improve our income statement, and then we will be able to borrow $100 million.

I just want to add one thing. We did, in 2013, we entered into a new credit facility which was $35 million, which can be increased to $50 million with an accordion feature. Right now, we have $20 million outstanding, but we will be borrowing an additional $10 million for our acquisition.

In 2013, how much did you get in cash on your cash flow statement from issuing stock through your DRIP?

Approximately $35 million.

$35 million.

And you're going to cut it back this year?

Yes.

Okay. And my last question is --

When I say yes, as we say, things can change. But if someone gets me $100 million acquisition of parks, I'll change my mind and raise more money. But at the present pace of buying communities, I think we are raising more money than we need.

Okay, good. My final question is why did you start doing conference calls and ramp up your growth strategy? For years, you've been radio silent and kind of slow-growing, and then all of a sudden you blossomed into whatever you are.

I really want to answer that question. Back in the early 2000s, we actually had directors and people say to us, why aren't we growing? Why aren't we doing anything? And my father, with his experience and knowledge, said it's not the time. The prices aren't right; now is not the time to grow. And I got to sit here and watch how strategy works and how difficult it is to implement a strategy of we are not doing anything because now is not the time.

Well, in manufactured housing, there has never been a better time to make acquisitions. This is an industry with a 10-year recession. And everything points to the need for affordable housing is greater than ever. We are subject to the problem of the finance laws make it difficult to sell homes, but they are being amended. But as employment growth -- as the Marcellus Shale area increases jobs, these communities should go back to what they were. And one of the interesting things about that is these communities we are purchasing were 100% full in the 1970s when the population was much less than it is today. So if there were 100% full in the 1970s, shouldn't we be able to fill them today with greater populations? And we will be able to as jobs and everything increase.

Our capital structure is designed -- and this is really, really the most important thing I'm going to tell you today -- it's designed to make a lot of money for shareholders. It's the public storage model that we issued the preferred and borrowed money to make acquisitions. We are sitting with $600 million in assets and only 20 million shares. If the assets go up in value 4%, it's $24 million, it's more than $1 per share. So if you want to say the expenses were high and the earnings weren't where they should be, those expenses had a purpose, and the purpose is to add value to the properties. And if the expenses added 4% the value of the properties, that's $1 per share. And I feel pretty strongly that the first year maybe people can't see the $24 million. In the second year, maybe they don't see the $48 million. But at some point, you can't hide that this capital structure worked and we greatly increase the value per share.

Sounds good. I am betting on your future. Best of luck. Thank you very much.

Rick Murray, Midwest Advisors.

Good morning everyone. My question relates to your commentary that the portfolio has a $500 million replacement cost. Clearly, that is a substantial premium to your stock price. So what I'm trying to reconcile is why you would continue to use your stock as a source of capital given that you're selling cheap and buying assets at higher prices, and how do you rectify the gap between the intrinsic value of the portfolio versus where your stock trades.

Usually I don't make this statement. That's a good question. It's a good question because it is something we really consider. We think the stock is worth a lot more than we are selling the stock for, and so that would seem to be a dilutive effect. But we have no choice in my opinion.

UMH is probably the smallest publicly owned REIT. We are only a market cap of about $200 million. We are rather inefficient -- not that we don't run, we run a public company cheaper than anyone. I give a great deal of credit to everyone that works here. They do a tremendous job. And we run a company for -- we ran it for $3.5 million, $4 million. We are running it at $6 million. I defy anyone to show any one of the 135 publicly owned REITs that run so inexpensively. And people work very, very hard here. You have no idea.

We switched over to a new accounting system, what do we call it?

Computer System.

-- the new computer system, and people were here night and day, weekends, running two separate systems at the same time and reconciling them with the same staff as before. It was a backbreaking job.

But going back to the capital thing, you can't take a short-term view. We would love to sell stock at $14 or $15 a share rather than sell stock at $9 a share. But we think that capital increases the size of the company, the liquidity of the company, and gives us the capability to borrow on this line of credit which may be up to $35 million or $50 million. And so if you just look at issuing the stock, it's dilutive. If you look at our ability to borrow, Anna borrowed $50 million or $55 million at 3.5%?

4.06%.

4.0%. So you have to take a larger picture. You can't just say, geez, you're selling the stock too cheap because you needed that capital to take advantage of the opportunity we had. And we had a once-in-a-lifetime -- as Sam pointed out, it was a once-in-a-lifetime opportunity where people just got tired of owning manufactured home communities because the recession in that particular industry had lasted so long and was so difficult that we had the opportunity to step in and buy parks before there were nine separate large institutions buying. When we were the only bidder we were able to get these parks. So -- but it's a good point. It's a good point, and any good management will really think two or three times before issuing stock at a discount. But we take into consideration all the other factors and have decided to do it.

Okay. So, to be clear, as you evaluate potential acquisition opportunities, you're looking at your blended cost of capital in doing so, is that correct?

The blended cost of capital, the fact that Sam pointed out we think these parks are going to rise. If demand exceeds supply in the housing business, then the value of the real estate will rise at, least the replacement cost, and that will mean that these will be some of the best acquisitions any REIT has ever made.

And now is a good time for me to remind everybody about our first of our acquisition programs which was Weatherly Estates in 2006 that we bought at $20,000 a site, and in our first full year, it grossed $754,000 with expenses of $260,000 and made $494,000. Six years later, in 2013, the gross doubled to $1.426 million, the expenses were $471,000 and we made $955,000. So our game plan works. We've done it before. And it just doesn't happen in six months. It takes some time.

Okay. Let me come at it a different direction. So, why do you feel that your stock continues to languish at such a dramatic discount to the value of the underlying assets in business?

Because we are not earning what we should. We may have a book value substantially higher but the earnings are not commensurate with the value. So, we have to fill those 2700 sites, double or triple manufactured housing sales and do it at a profit, and get to the next cycle.

But we spend time with some very nice people in the investment business. We tell them our story, and we are generally very well received. So we think people understand what we are doing and we think our stock will eventually go to the price that it should be, but it's not there today.

You're talking to someone who invests in other REITs, who has been in the REIT business and who really doesn't believe in the efficient market theory because many, many times we've seen that stocks up and sell at a price that doesn't make any sense, but they eventually do. If we make progress on the earnings front, you'll see a much higher price for UMH.

We need to (technical difficulty) financial public relations, and Anna and I are going on the road next week, and we're going to continue to increase our financial public relations next year.

Perhaps you ought to visit with one of these nine institutional organizations that are so aggressively buying manufactured home communities and see if they might pay a premium for a large portfolio.

We are well aware of our fiduciary responsibilities, and we do talk to everybody. We know everybody in the industry. We have the burden of talking to them and listening to them, and we do think that the industry will consolidate. We think that -- we know the nine groups, we know others, so we think there will be some consolidation in the industry. We are not opposed to it.

All right. Thank you very much. Good luck.

David Minkoff, DCM Asset Management.

Good morning gents. It seems to me that the reason the stock is where it is is because the occupancy rate is as low as it is. You compete with apartment rentals. The apartment rental industry is booming right now. So something is wrong with your sales process, perhaps. One of your competitors that I'm sure you know of has an occupancy rate of the low 90s%, 92%. And when they sell 400 homes in a quarter, 200 come from rentals that transfer into ownership. So I think you need to be more aggressive on the rental side. That is the quickest way to a sale. I know you want to sell your property, but sometimes you've got to do it by renting first and getting someone in the community being comfortable with the community, and then they become a buyer. That is the best tool. That is even better than opening up the sales offices you are talking about. So how many homes did you sell in the quarter, or year, and how many were from rentals?

I will let Sam answer that, but I'd like to -- your question is a very good one, and we agree with you. We may have to do more on rentals. We are well aware. We watch our competitors very closely, and we are well aware that some communities in the US are reporting improved results sooner than UMH reported it. But we think that's actually good news, because maybe we like to hear that things are improving.

Now, you have to realize, David, you know this, Sun bid 9000 rental units at a cost of $360 million. That's a very substantial investment. And looking back, it was a good move on their part, and we have made nowhere near that type of investment. But I think Sam is correct. We're going to increase our number of units we rent. We are going to continue the sales process, so we really think that's the long-term future of the industry, but we are not averse to increasing the rental units, because the rental market is strong.

Sam, go ahead.

Wait, wait. It's very important -- here's why I don't like that number, portfolio percentage occupancy. Because if I buy a portfolio that is 60% occupies, it reduces my percentage occupancy. If I buy a community with 320 sites and only 160 occupied, it reduces my percentage occupancy. So percentage occupancy can be a misleading number, and on top of that, vacancies could be a good thing if the market turns around. But let me go a step further.

Last year, remember, we junked 209 homes total, which means I took out 209 old homes, and occupancy was still up 56 units, which means we put in 264 new units. We had 100 new home sales, and we added 200 rental units which didn't all rent right away. But that's -- we very much embraced the rental program. We very much embrace the idea that rental residents become buyers because it's their first taste of the product. So, we agree with you 100% and want to continue to increase rentals. And I just had an article published about why rentals work so well, because they break down the barriers to entry for the housing. So we agree with you 100% on the rentals.

Okay. So in the 17 communities that you acquired this year, what was the average occupancy rate on those communities?

It was approximately -- I believe it was approximately 80%, 81%, 82%, pretty much what we rented at.

I thought your recent acquisitions were up near 90%. Maybe that was the year before. I seem to remember, in one of the presentations, that I think the properties acquired were running close to 88% or 90%. Is that not right?

That was 2012. It was approximately 90% occupancy. In 2013, I would say it was about 82%, 83% occupancy.

Let me caution on the 82% occupancy, when we go in there --

Right.

-- it's 82% occupancy, and we take out homes that were there because they're not suitable, and the occupancy goes down a little bit.

Right, right. All right. So it seems to me the missing link then is the rental. If you get more aggressive on that, you'd probably double your sales when those renters convert to owners, which is really what you want. But it's just an interim step to get there, it seems to me. That's all I would add. I think that's the problem. When you look at the competitor running at 92%, and he is aggressive on the rental side, that's the missing link between you and he. So --

We can solve the topline revenue problem, and we get better occupancy by substantially increasing rentals, and we are not opposed to it. But the long-term future of our company is in sales, which depends on a recovery of housing, which depends on -- (technical difficulty) -- of jobs. And the majority opinion of the economists that we talked to and that we read about say that this spring maybe a very good spring, jobs may be increasing, and housing formations may increase, and we may be able to get a turnaround in the sales operation. If we are going to fill the park two different ways, I would much prefer it by selling homes than renting homes. So we are trying to do both, and we are determined to fill the park whichever way we have to, but don't discount the fact that the housing market can turn around dramatically this spring, and if it does, UMH hopes to benefit from that.

Paula Poskon, Robert W. Baird.

Thanks very much. Sam, so just to follow-up on this occupancy discussion, I understand your point that if you buy something that is under occupied, it does drag down the portfolio occupancy. But in your prepared remarks, you commented on your same-store occupancy, that that didn't really go up very much either. So, can you give us more color on the occupancy trends you are seeing in your same-store pool versus the things that you are buying currently or recent acquisitions?

Sure, sure. Same-store occupancy was up 80 units for the year. Only two communities have substantial declines in occupancy. One community we owned for one year, Maple Manor, where we removed 19 homes. We are rapidly putting in new homes that are quickly renting. The second was Royal Village where a large group of Marcellus Shale workers left before the winter, causing 20 vacant rentals. They are now re-renting quickly. Those people, by the way, were on two-year leases. The two-year lease expired, they came vacant, and at this moment most of those are re-rented.

When you look at total occupancy, including new communities, like I said, that's only plus 56 units. But the rentals are renting as quickly as we put them in.

A very important point, UMH is nearing its 3000th home sale in our history. And the reason that's important, we used to have a portfolio of 6000 sites. Most of the homes in our existing communities are really less than 15 years old because we've replaced the old with new. It's the new communities that have some of these homes from the 1970s, quite a few in some instances, which require this turnaround of removing 200 homes in a year. Basically, when we add 10,000 sites, I said you have 2% of obsolescence, you're going to lose 200 homes a year. Those 200 homes come out, 200 brand-new ones come in, and this year it's 200 plus 50. The more rentals we buy, the faster it will go but still, like my father said, the housing market really affects us. We know, in our 55 and older expansions, and we have about three of those going right now, until people can sell the home they live in, they cannot buy from us. And so we have a number of expansions that were built to have profitable sales that are sitting there with almost no sales.

And just to be specific, the 80 units that you gained in occupancy in the same-store pool represents what percentage increase?

So, let's say we are talking about 10,000 sites, so what is that? It's less than 1%?

Less than 1%.

Less than 1%. And at what pace do you expect that to normalize? And what occupancy level do you consider to be normalized?

What you have to back up on, I believe virtually all of our communities have the potential to be 95% occupied. In the Northeast, you're talking about New Jersey, Eastern Pennsylvania, to the extent we have vacancies, it's three or four lots and it's for the purpose of having a brand-new home for sale.

So then you get to the communities that we have with substantial vacancies, which now you're talking about Ohio and Western Pennsylvania, and these are locations that have been economically dead for 10 years. Now, this Marcellus Shale workers and what's going on there is very for real. The employment gains there in the Pittsburgh area, and we are in Cranberry, Pennsylvania, we are right where these things are happening. That's what leads us to be able to fill rentals as quick as we put them in. It's a substantial number of vacancies we have, 2700 lots, but as you see, last year we filled 280 units, the 200 homes we replaced, plus same-store up 80. So we can do better than that, but 300 homes a year is a pretty good number in this economy.

Okay, thank you. And your response to I think it was the first question on the operating expenses, I think the detail on what the dollar amounts were and in what category would be very helpful if you could provide those.

Sure, sure. Of our $2.1 million in repair and maintenance, $1 million of that was related to home removal. $350,000 was related to waste removal costs. $77,000 was security and taking a new community, and making it so people could live there and want to live there. $700,000 was rental home expense related to when we acquire a community with existing rental units that are older, they may need substantial repair and maintenance, so $700,000 was that. And $300,000 was additional labor related to bringing these new communities up to our standards. And when you are taking a new community, the old operator might have had one person in the office, and that person might have been the maintenance manager too. And if we're trying to fill sites, we have to add additional labor that you otherwise wouldn't need. So, $300,000 of that is additional labor, and that's where my $2.4 million comes to.

On top of that, and I didn't count this in the $2.4 million, but on top of that, our existing communities primarily have separately metered city water and city sewer. And what that does is, in a very cold winter like this winter, people, if they run their water to stop their pipes from freezing, have to pay for it. A lot of the new acquisitions do not have separately metered water and sewer, although we're going to put that in, but we don't put it in the day we bought the community. And what occurs there, A, residents may not have purchased heat tape; B, when it substantially cold, they'll run the water and sewer, sometimes even if they -- they'll run the water sometimes even if they don't -- sometimes even if they do have heat tape, they'll run the water. And this increases your water and sewer costs dramatically in a cold winter. When we get them separately metered, that will be very their cost, not ours, but that also had an effect on the operating expenses in the fourth quarter.

That's very helpful. And then just to be clear, the other costs that you mentioned, the pension, the accounting accrual I think it was, that was I assume booked in G&A?

Yes, it was.

Okay. And then the third category, I'm sorry, was, oh, the software system. I assume that that was also in G&A, or did you allocate some portion of that to the properties? And secondly, did you share any of that with your sister organization with whom you share resources?

No, this the new system that we put in. The system itself of course is capitalized. However there were additional expenses associated with bringing the system online. For instance, as Gene had already mentioned, we had to run parallel for the quarter. And to run parallel, we did hire quite a number of temporary help. We've also had to do a lot of training, and that entailed traveling to all the communities. And all that was in G&A this year -- this quarter.

Okay. That's very helpful, Anna. Thank you. And then just finally on the acquisition front, I just want to make sure I got this correctly in the discussion of the previous Q&A, that you see the pace of the acquisition flow decelerating, and therefore you think your DRIP issuance and SIP issuance will also decelerate through the year.

We've cut it back, and we are considering cutting it back further. Right now, we have announced that we have a contract on --

We have a total of $37 million.

$37 million, and we've announced that we will probably take $15 million and we have been raising capital in advance of that. So we have sufficient capital.

I can't tell you what the acquisition portfolio is going to be. We are offered deals repeatedly, and we look at two or three deals a week. So, it's very difficult to say that it's going to be cut back or not. It depends on what we are seeing and what is available. But knowing the competition, I don't think $100 million over the next two years is feasible but not $100 million a year. I don't see that. But that's not a number that I can be precise on because you don't know -- you have somebody you talked to three years ago come back you.

Understood. I understand. And Anna, is the previously disclosed $25 million acquisition for the 1000 sites in Ohio, is that part of the $37 million, or is the $37 million incremental?

No, that is part of $37 million, and it's going along fine. It's just sometimes we underestimate the time it takes to close.

Okay, thank you very much. That's all I have.

Michael Boulgaris, Boulgaris Investments.

Good morning and thank you for taking my questions. You indicated in your release that the expenses will decrease in the upcoming quarters as you did in the previous release. Can you quantify that somewhat for us or give us some guidance that might be helpful?

I can. On the operating of the communities we already closed on, I believe that they have $2.4 million in expenses that will not reoccur in the following year. Now, as I say that to you, I am very aware that we're going to close on communities that need additional work so that I won't be re-spending the $2.4 million I spent last year on the same communities I own --

I understand.

-- but the portfolio we are purchasing is going to run at a higher expense ratio than what's normal because normal is 40% to 50% and we're going to be above that, not on every community we are purchasing, but on some of the communities we purchase.

Okay. It is certainly impressive that you are making and following through on these investments and your acquisitions and executing on upgrading those to your high standards. Maybe -- since we have our Chairman on the phone, maybe you or Gene can speak to the dividend during this period of growth. Do you feel that -- are you confident that the dividend rate might be maintained during this period of growth, or should we be a little more cautious with these capital investments that you are making?

I have to start again, but everyone who is listening to this conference call knows that management is very optimistic. And at our next board meeting, we're going to make an optimistic presentation to the Board of Directors. But it's the Board of Directors that votes the dividend, and they will vote the dividend based on the situation at the time the dividend comes up. But Sam and I are going to recommend to the Board that we continue the dividend because we think that the earnings are going to improve, and it doesn't make sense to us to reduce the dividend because we are not covering the dividend at the current time with the current earnings when we think that in the near future we will cover it. So we have had a dividend policy. I don't know how many years we paid dividends. It's a long long time. UMH is very proud of its dividend record, and we are sorry we only earned $0.61 last year and we paid $0.72. And there's a shortfall. And it's a shortfall with permanent and I would have no hesitancy in recommending to the Board that we cut the dividend.

But at the present time, looking at all the factors, I will recommend to the Board we continue the dividend. Now, they may or may not take that the regulation because of the SIP. We are not covering the dividend at the present time. But I am hopeful they will take the recommendation and then we will continue the dividend. I am hopeful, between now and the Board meeting, that we are going to get some good news on the economy, that housing will pick up and that employment will pick up. So we are watching that closely. But you have a company here that has a tremendous future, and certainly has the capability of increasing earnings and leading this $0.72 threshold.

Thank you for that color, and it certainly is appreciated that you continue to make those aggressive investments in upgrading the communities and as you execute your growth plans. So, thank you for taking my questions.

This concludes our question-and-answer session. I'd like to turn the conference back over to Samuel Landy for any closing remarks.

Thank you operator. I would like to thank the participants on this call for their continued support and interest in our company. As always, Gene, Anna and I are available for any follow-up questions. We look forward to reporting back to you after our first quarter.

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