UMH Properties Inc (UMH) 2014 Q2 法說會逐字稿

Good morning, and welcome to the UMH Properties Inc second quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. It is now my pleasure to introduce your host, Ms. Susan Jordan, Director of Investor Relations. Thank you. Ms. Jordan, you may begin.

Thank you very much, operator. Our 10-Q that we filed with the SEC yesterday is available on the Company's website at IR.UMH.com. I would like to remind everyone that certain statements made during this conference call which are not historical fact 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 second quarter 2014 earnings release and filings 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 second quarter ended June 30, 2014. UMH continued to execute its growth strategy of purchasing well-located communities in our target markets, including the energy-rich Marcellus and Utica shale regions. We have increased the number of our developed homesites by 13% over the prior-year period.

Subsequent to quarter end, we purchased an additional six manufactured home communities, located in Pennsylvania and Ohio, for an aggregate cost of $17.6 million, or $30,000 per site, which is well below replacement cost. These all-age communities totaled approximately 600 developed homesites situated on 278 acres. The weighted average occupancy for these communities is 87%. Additionally, over the past four years, we have more than doubled our portfolio by acquiring 60 communities, totaling 8,300 developed homesites. Our portfolio is now comprised of 88 communities, with 15,100 developed homesites in seven states.

We continue to seek acquisitions in our target market areas, and currently have a definitive agreement to purchase one manufactured home community in Pennsylvania, with a total of 141 developed homesites, for approximately $4.2 million. This transaction is anticipated to close during the third quarter of 2014. We are currently in various stages of negotiations for additional acquisitions. Income from community operations increased to $7.4 million for the second quarter of 2014, as compared to $6.8 million for the same period in 2013.

Overall occupancy has increased 40 basis points, from 81.3% at year end 2013, to 81.7% currently. Current overall occupancy reflects 2014 acquisitions of approximately 1,000 sites, with a weighted average occupancy of 71.1%. Same store occupancy has increased by 130 basis points, from 81.3% in the second quarter of 2013, to 82.6% currently. With chattel loans for homeowners remaining scarce, we continue to see increased demand for rental units. In 2013, we added approximately 300 rental units to selected communities, and acquired 300 rental units as part of our 2013 community acquisitions.

During the first half of 2014, we have added an additional 210 rental units. At quarter end, we had 1,975 total rental units. Occupancy in rental units continues to be strong, and is currently at 92.6%. Occupied rental units now represent approximately 15.7% of total occupied sites. Because occupancy increases have been driven by home rentals, we will continue to add more rental units as demand dictates. It is our intention to ultimately convert current renters into homeowners in the future.

Our sales of manufactured homes for the quarter increased slightly, from $2.3 million in the second quarter of 2013 to $2.4 million in the second quarter of 2014. Although overall shipments of manufactured homes were up 5.2% nationally, this growth can be attributed to just a few states. And manufactured home shipments were down 8.7% in the states where we operate. The pace of the housing market recovery has slowed. Seasonally adjusted home prices fell 0.3% in May from the prior month. Housing starts dropped 9.3% in June from the prior month.

However, the multifamily rental market continues to fuel the housing sector recovery, and is experiencing similar increased demand, as we are seeing in our home rental program. UMH's core funds from operation have continued to increase, from $0.05 in the fourth quarter of 2013 to $0.11 in the first quarter of 2014, and now to $0.15 for the current quarter. While this amount still falls short of our $0.18 per share quarterly dividend, we are encouraged by the recent growth in our per-share earnings. Increased occupancy and improved sales should further improve our operating results significantly.

UMH remains positive as to the future prospects of housing, affordable housing and manufactured homes. The US must build 1.5 million new housing units a year to keep up with the growing population and older homes falling into disrepair. The nation has not consistently built more than 1 million units a year since the 2008 recession. Additionally, over one-third of US families and individuals are cost burdened, having more than 30% of their income utilized for housing. The need for low-cost housing alternatives continues to rise.

For this reason, we will recommend to maintain the continuation of our current dividend to our Board of Directors at the next quarterly meeting, not withstanding the current shortfall. And now, Anna will provide you with greater detail on our results for the quarter.

Thank you, Sam. Core funds from operations, or core FFO, was $3.2 million, or $0.15 per diluted share, for the second quarter of 2014, compared to $3.1 million, or $0.17 per diluted share, for the second quarter of 2013. Core FFO, excluding securities gains, was $2.5 million, or $0.11 per diluted share, for the second quarter of 2014, compared to $2.7 million, or $0.15 per diluted share, a year ago. As Sam mentioned, core FFO is trending higher over the past two quarters, sequentially.

Rental and related income for the quarter was $15.8 million, compared to $13.8 million a year ago, an increase of 14%, primarily due to the acquisition of 14 communities since the prior period. Our community operating expenses for the quarter were $8.3 million, compared to $6.9 million a year ago, representing an increase of 20%. Community operating expenses for the quarter were 52.9% of rental and related income, a reduction from the 54.5% for the year ended December 31, 2013, and the 55.8% in the first quarter of 2014.

Income from community operations amounted to $7.4 million for the quarter, compared to $6.8 million a year ago, representing a 9% increase. Sales of manufactured homes amounted to $2.4 million, or 40 homes, and $2.3 million, or 43 homes, for the quarters ended June 30, 2014 and 2013, respectively. Our loss from the sales operations, including interest expense, increased from $128,000 for the second quarter of 2013, to $458,000 for the second quarter this year. Increases in advertising costs, salaries and expenses associated with setting up sales centers contributed to this loss.

Setting these sales centers up and staffing them requires a capital investment, but we believe these sales centers have the potential to generate meaningful positive results going forward. The above losses do not take into consideration allocation of corporate overhead. As of quarter end, our capital structure consisted of approximately $239 million in debt, of which $176 million was community-level mortgage debt, and $63 million were loans payable.

95.4% of our mortgage debt is fixed rate. The weighted average interest rate on our mortgage debt is 4.8%, and the weighted average maturity is 5.6 years. We also had a total of $92 million in perpetual preferred equity at quarter end. Our preferred stock, combined with an equity market capitalization of $225 million, and our $239 million in debt, gives us a total market capitalization of approximately $556 million at quarter end.

From a credit standpoint, our net debt to total market capitalization was 41%. Our fixed charge coverage was 1.7 times, and our net debt to EBITDA was 8 times. From a liquidity standpoint, we ended the quarter with $11 million in cash and cash equivalents, and $5 million in availability under our credit facility, with an additional $15 million potentially available pursuant to an accordion feature. After the quarter, we drew down the $5 million in availability to fund our recent Ohio acquisition.

We also had $6 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $62.8 million in marketable REIT securities, encumbered by $13.1 million in margin loans, at 2% interest. Generally, 50% of the market value of REIT securities may be borrowed on margin. At the end of the quarter, we had $5.5 million in net unrealized gains on our securities investments, in addition to the $1.2 million in total gains realized thus far in 2014. And now, we would be happy to take your questions.

(Operator Instructions)

Our first question comes from Brian Hollenden of Sidoti.

Good morning guys, and thanks for taking my call.

Good morning.

Can you give us an update on your sales centers, in terms of how they are performing, and how many there are?

First, we just opened a brand-new sales center at Port Royal Village in Belle Vernon, Pennsylvania. And it was extremely well received, a number of very real customers. It's too early to really say they are deals, but we think we have six potential deals just from the first week. They are land home deals, five outside the community, one inside the community. But the other sales centers you have, you have the Sunnyside in the Somerset, Pennsylvania area, Kinnebrook in the Monticello area, Heather Highlands. And that's probably it for freestanding sales centers in front of the community.

So everyone on this end -- this is Gene Landy, Chairman. UMH is unique in this regard. No one else in the industry, in the face of an industry that's declined from 250,000 sales a year to about 72,000 now, that is gearing up for a recovery at the industry. And we are opening these sales centers. One, we think we can make money with them. And two, of necessity. There is no competition. There is no, what we used to call street dealers, the mom-and-pop operations that used to sell homes that fill out parks aren't there. So we are planning to do it ourselves. And we are hopeful that, if the industry recovers, that these sales centers will generate substantial sales for the Company, substantial profits, and fill the 3,000 vacancies we have in our communities.

So the four that you have now -- do you plan on opening another four over the next year? Or is it wait and see how these four perform?

It's wait and see how they do. The current scenario, the past year, the sales have been pretty much the worst they've ever been. And as recently as a week ago, I might have told you I'm about ready to give up on sales. But the last week has been pretty good with sales. And not just the opening at Port Royal Village, but another community, D&R Village, had four sales in one week. And sales are very dependent on the economy and how people feel.

The past month, we sold eight homes, with six of those being cash deals. That's relatively unusual, because usually, about 50% of the deals are cash deals, and 50% are finance. So if we add 6 cash deals, you would think we would have 12 deals, with 6 outside financed. But a cash buyer of a manufactured home is getting the best deal there is. If you are paying less than $100,000 for a house, or you have $100,000, there's probably no better deal than a manufactured home. The problem is, if you are buying a financed house, our interest rates are higher than on conventional houses.

So when you start having finance deals, maybe we're not as competitive with a land/home deal. So then, your normal buyer would be a buyer of necessity. They can't -- they have difficulty with their credit, and so they are willing to pay the higher interest rates. But the current scenario is, it's not legal to finance people with bad credit, even if they are coming from a $300,000 house to an $80,000 house. So these laws pertaining to financing have our hands tied. So we get plenty of interested customers, but we can't sell to them.

Fortunately, we can rent to them, and our rental demand is extremely strong. And our rentals are doing great. And absent an improvement in sales, we could take every home we have in inventory and rent it out within six months. But there's a lot of reasons to believe that, in the regions we are located in, people's incomes are going to increase through the Marcellus and Utica Shale. If home sales pick up again and these things happen, these were profitable sales centers that will be profitable again. And we just have to continue to wait and look for this increase that we are seeing a little bit of in August, and hopefully it'll just get better.

Okay, so you see the financing improving going forward here?

It is difficult to say. There are financing alternatives available. This program we entered into with 21st Mortgage should be very good for the customer. But the number of applications that get turned down because they cannot qualify under the Safe Act and Dodd Frank is an incredibly high number, and those people are great rental customers. They're great customers. But we can't sell to them.

And until we can, it is a major headwind. The fact that there is cash buyers buying homes for cash tells you what a great product it is, and how well priced it is. That people are willing to take $80,000, which is their whole life savings, and buy a house from us, is a fantastic positive statement about the product in the community. And we'd like to be able to take 10% down from people and sell them houses. But the current laws are really putting a damper on that.

This is true, not just for manufactured housing; conventional homes are having the same problem. The first-time home buyers for existing units are down 50%. The used to be 40% of the market; they are 20% of the market. And first-time home buyers for new homes, it is astounding. Used to be 24% of the market; it's 2.4% of the market. So these laws have basically decimated the first-time home buyer.

The first-time home buyer, almost by definition, is going to struggle to make his mortgage payments. And under the current laws and regulations, there's really very little way to get him financing. We are hopeful that there will be changes in the law, but it will take time.

Okay. And then if I could switch up the questions a little bit. About how long after you make an acquisition do these expenses begin to normalize, after you up -- after you make the upgrades to your property purchases?

Each community is different. I just took someone on a tour of communities we purchased two years ago, and some communities are in very good shape as is. And so you're going to make some capital improvement and some additional expenses the first year, and the second year, you'll be fine. Other communities, and I'm thinking specifically about Colonial Heights, just half an hour outside of Pittsburgh, even into the second year, you are still having high expenses. And you'll probably still have them in the third year. But it won't be more than three years.

And every community we've acquired, I'm extremely proud of our entire staff, our Vice President of Acquisitions, Vice President of Operations, Vice President of Engineering. We have truly upgraded these communities. We've added approximately 200 rental units this year. We plan to add 400 rental units during the course of the year. And they're getting these homes in, landscaping the lots, making a place look beautiful, and filling the houses. And it's going extremely well. And so it's not shorter than a two-year process. But some communities you purchase are in really good shape, and it's only a 12-month process.

Okay. And can you talk about the acquisition? What you're seeing out there, in terms of cap rates with some of the deals that you've recently done? And what you're looking at? Are we still talking about cap rates that are in the mid 7%?

It's getting more and more difficult -- this is not just true of manufactured housing; it's true of all the REITs and all the real estate. Cap rates continue to decline, competition is fierce. UMH is continuing to buy parks, because we're staying a little bit below the radar screen. And we are buying 3 million, 5 million, 10 million. And as you know, there's been a major acquisition announced for $1.2 billion, and the announcement said that there were 80 bidders for the -- original bidders for that package.

So there's tremendous competition, and cap rates continue to fall. As Sam pointed out, we're very proud of the acquisitions we've made. We've taken the Company from 6,000, 7,000 sites to 15,000 sites. And we did it at much lower prices and higher cap rates than the present day. But we're at 15,000 units today, and we are trying to continue the acquisitions, and to get the Company up 17,500 to 20,000 sites. But it's not easy.

The original game plan was you buy $100 million in [po acs] at 7.5% cap rate, and you finance it at 5% and pick up $2.5 million, plus the future, which is the more important thing. And the asset will be valuable. Very, very difficult to do that today. Cap rates are probably sub 7%. And even at those rates, it's very difficult to find a community. The positive side of that is, UMH is sitting with 15,000 sites, and it's a very valuable Company.

Appreciate the color. Just one final follow-up, and I'll jump into the queue. Just quantifying a little bit more over the next year or two, to about how much capital do you plan on deploying? Within the next 12 to 24 months?

When you think capital, we run a very conservative REIT, and it is low leverage. And we think we're at the point now that we should be able to refinance the entire Company and generate $50 million or $100 million. Not of -- and we will be able to redeploy $50 million to $100 million over the next two years. So the structure now is to work on trying to take advantage of current low interest rates, refinance the Company. How many parks do we have, Anna?

We have 88 communities right now.

And what's our debt?

Our debt is $176 million in mortgage debt, and we have approximately $60 million in loans.

So we have a wonderful portfolio. And the game plan is to refinance it, generate $50 million to $100 million, and put that $50 million to $100 million to work. Now to get to that point, and to be sure we get to the point, we have continued to use the -- raise the additional equity capital. But at some point, we're going to be in a position to make a major refinancing of UMH.

And just in regard to the capital needs, last year, we added 300 rental units. This year, we're going to add 400 rental units. When I told that to one of our shareholders, he said, why aren't you adding 500 units? We thought about it, and so our goal for 2015 will be 500 rental units. So that will be our --

And we've been doing that with cash. So it's 400 rental units, counting the cost of installing them. It's well above $16 million. That's the advantage of having a well-capitalized Company.

All right. Thank you for your comments. I'll jump back into the queue.

Our next question will come from Craig Kucera of Wunderlich Securities.

Hi, good morning.

Hi.

Was going to ask, and maybe you already answered my question. But you have seen the improvement in the same store occupancy. Did you see any improvement throughout the quarter? Any pickup in traffic levels? Or should I take from your commentary on sales that has been not so great, until here we are in the third quarter?

The traffic has actually never been bad. The traffic has always been good, and the number of applications is higher than ever, which is why the rental units do so well. It's -- this past week was a phenomenal week for potential customers. Prior to that, however, sales are not near where they should be.

And you go back to the first quarter -- the first quarter, the problem was, as people learned how to make the applications under the new rules, that delayed everything three months. You go to the second quarter, while people weren't getting approved, they're not getting financed, and so they lose interest in purchasing. At this moment, you are at that time when people -- it's right before you go back to school, so it's always a very busy time. But we are seeing some positive signs that there is just no way to know whether or not they will continue. But they look pretty good, right at this moment.

And we don't know -- the method of selling, at present, is to sell from each community, with models on a community. And we are experimenting, and it has not been a very expensive -- relatively expensive capital-intensive thing to open these sales centers. But we're hopeful that this idea will work, as we didn't originate the idea. Historically, when the industry is doing well, there were super sales centers. In fact, some of our sales centers are located where, historically, a successful sales center was 10 years ago.

And these sales centers sold 20 million, 30 million in homes, and were very successful. The question is, does the customer prefer to go to a sales center, where you can see a multitude of models, and it's retail outlet on the highway, at a good location? Or does he like to be in the -- go to the community itself? And we are trying both methods now.

Got it. And so working with 21st Mortgage, I know earlier in the year that you guys had hoped that that would help people out a bit, as far as qualifying. I believe -- and please refresh my memory. Those mortgages are 200 basis points inside, roughly, of where you would be pricing things? And are the criteria any tighter than the way you would do things? Or is it basically the same sort of criteria, but maybe 2% cheaper?

They are not tighter. The 21st deal is able to solve some problems, but they can't solve the debt to income ratio problem, which is the number one problem. Imagine somebody is forced out of a $200,000 house, and now they want to buy an $80,000 house. All that matters to me is down payment and income. They give you 10% down, and 30% of their income covers their lot rent and finance payments, a person is going to pay you.

A person who is satisfied with the product, and has the ability to pay any -- they're going to pay you. When this artificial criteria of debt to income ratio gets put into the play, these people get declined for financing, and we can't sell them a house. And they'd be perfectly good customers. So we wind up renting to them, and nobody has been able to find a solution to that. And that's the gigantic problem that's out there.

Got it. With the Sun Communities deal, obviously, that's a really large deal. You guys had grown significantly in the past few years, but more of a -- I would say, it's more of a piecemeal basis. Could you -- do you think you could integrate a large transaction like that? What would that -- how challenging would that be, to bring that into your system?

First, I have to say that the staff did an amazing job integrating what we did. We went through -- we had to put in a new accounting system, and run two accounting systems at the same time. We had to double the size of the Company. Though I don't -- I want to make sure you know how difficult it was, the long hours people had to put in, and the effort involved.

Having done it once, I think we can do it again. In fact, we keep the Company in a position that, if we were offered a portfolio of $50 million to $100 million in parks, we would not hesitate to do it. Either by capital restraints, personnel restraints, or the capacity of Management. So we can handle the $50 million to $100 million. Could we have handled the -- no, we couldn't have handled what Sun Communities did. They had their hands full, at $1.2 billion.

All right. Thanks, appreciate the color.

Our next question comes from Stephen Dye of Robert W. Baird.

Hi, good morning.

Good morning.

I was just wondering if you could help me quantify if there are any one-time items in the operating expense figure? There's usually some sort of home demolition or tree removal expenses. Do you know what that number is for this past quarter?

This past quarter, it's approximately $250,000 to $500,000. As we said, we always have these type of expenses when you purchase a community, because a lot of times, the prior owner would not -- would leave the trees the way they are. They would leave the homes there, and it's up to us, when we upgrade the community, to remove them.

Okay. And do you have a sense of what those costs will be, with this $17.6 million? And then the additional acquisition in the third quarter?

I would guess that it would be approximately the same, because our -- it's approximately the same dollar value of acquisitions that we've had.

The important thing to know, and people who have been on the call before already know it, but I will just repeat it again. Communities -- the goal is for communities that are over 90% occupied to operate either at a 50% expense ratio, if we pay the water and sewer, or at 30% expense ratio if it is separately metered to the customer. And we have a portfolio of mature communities that we have managed for years. And that's where the numbers will be, after you get the occupancy over 90%. And you make all the capital improvements, and take care of all the deferred maintenance.

As of August, our rent roll is up to $5.45 million, which annualized, would be $65 million per year. In 2012, our monthly revenue was only $3.5 million. In 2013 our August revenue was $4.69 million. So we're up to $5.45 million in monthly revenue. So these acquisitions will eventually go to -- the revenue will eventually come to the bottom line at 30% to 50%.

Right. Okay. And then just talking about rentals. So you're going to add, it seems like a lot, this year and next year. And you mentioned that you are at 15.7% of total occupied sites or rentals. What number would you like that to be at? Are you happy where it is now? Just a little more color on that, and the future of the rentals business?

Let me be clear, it's not a static situation. We buy 1,000 units with 200 vacancies, and we're going to put 50 new rental units in there. That was the game plan when we bought the units. So we're not taking a static portfolio and adding 300, 400, 500 units. We're taking a portfolio that's growing 1,000, 2,000, 3,000 units over two to three years. And we will be adding -- we like to keep the rentals to 10%, but we have no ceiling on it at the present time. But if the demand is there, we will put rental units in and then we will do the same thing Sun Communities is doing. We will try to set up a program to convert the renters into owners, and sell them the used units over years, as they improve their credit and the ability to pay for the housing.

We have discussed this in the past. And basically, because of the change in demographics, that people are less interested in signing long-term notes. They are more mobile. The fact that financing is unavailable. Rentals are just the way to go. And at this time, we don't want to create just a random percentage of, that's how many rentals we're going to put in. We're going to put in as many as demand dictates.

Keeping in mind that certain communities and certain lots are really only made for double-wides and home sales. And so those communities, you would never put rentals in. But there's other communities that you really shouldn't say, I only want 20% rentals in this community. You should just make the decision that you are going to maximize your income in this community by maximizing the number of rentals you put in it. That's what we do.

Great. Thank you.

And showing no further questions at this time, I would like to turn the conference back over to Samuel Landy for any closing -- I apologize. We do have a question. If you like to take one more, from Mike Boulgeris of Boulgeris Investments.

Of course we will take one from Mike Boulgeris. (laughter)

Thank you for taking my questions, good morning everyone.

Good morning.

Sam, you -- in the release, you indicated that the same site occupancy increased 130 basis points to 82.6%, which is up year over year, and up sequentially. Do you see this trend continuing throughout the remainder of the year? And is there enough stability in that trend, where you could maybe give us some additional clarity, as to where you think that same site occupancy might be at year end?

Sure. Out of all of our communities, only two communities had any decline in revenue, and neither one of them was really meaningful. It was just us taking houses out. Other than that, the rental units are filling pretty much as quick as we put them in. They have -- we have 93% rental occupancy, which is just incredible. And everyone out in the field says as soon as the house is set up and ready to go, it's rented.

So that is just tremendous, so we're going to keep doing that. And that keeps growing revenue and occupancy. And we -- I do believe that we could put 500 rentals in next year and fill all of them. So we're very excited about that. We've had a few communities that we've owned have reported 100% occupancy. So we're seeing positive trends through the rental unit program.

And this program we've talked about, in terms that you lost your distribution, not where the industry did, I guess. And you have your sales centers now. And you also alluded to, I think, in the past, a billboard campaign, internet, more internet activity and marketing. Can you just give us an update as to, is the whole program coalescing into getting some traction now? Or is it still a work in progress?

Here's what's going on there. Everything we're doing is obviously working, because you see it in the rental units, and you see it in the occupancy. The problem that exists is, your standard customer who goes to a manufactured home community, they're going to qualify as a rental resident. But there's a whole world of people who have never thought of manufactured homes in land-lease communities as their housing alternative. And those people may have higher income, and higher down payment, and better credit. And that's a group of people we have to market to that we haven't marketed to in the past.

I just hired an additional public relations firm called Source Communication, and the coincidence is so amazing. I almost can't give them credit. They only started with us three weeks ago, and at D&R Village, we're going to have four home sales this week. It's just too amazing. But what we have to do is, we have to get to these -- the whole -- suburban mom, suburban family, that just never thought a manufactured home community is the place for them. And get them to know that our houses are better than ever, our pricing is better than ever.

This is the best housing choice you could make. We can save you a minimum of $3,000 per year, and put you in a better house. Why don't you come look? So we -- just in the past two months, we've increased the money we're spending to get that message out. And I want to continue to increase it, because it's my belief that that's the only thing that will get you through this finance problem, is to get higher-quality customers who have never thought of us in the past.

At your NAREIT presentation, you did have a slide that talked about this essential acreage that UMH Properties does have. Any further plans in developing some of those -- some of that acreage?

Sure. In response to the fact that, in the Saratoga area and Clifton Park, we're doing well. We had a 50-lot expansion approved at Brookview Village in Saratoga. And we let the approvals lapse, because they were approved in 2007, and nobody wanted to build anything. We are re-instituting those approvals right now, and hope to build those 50 lots next year. And there's a lot of reason that that will do well. We have the Coxsackie project, 220 acres, that we're going to take 60 acres and try to get 180 lots approved.

We have expansions that were built in the good times that have vacant lots. And these are things that are costing us money today. And have cost us money the last four or five years. You're trying to sell homes on vacant lots, and you keep putting in the effort. And the effort costs money, and you're not getting the results. But those, one in particular, Somerset, we're starting to see some positive activity. And if they all got going, it would really have a significant change in the loss that's coming from sales becoming a gain.

So one of the -- people value UMH, strictly based on income. And people lose sight of the fact that we have a sales loss caused by a bad sales atmosphere that can easily go away and turn into a profit. And we have all of this vacant land that earns no income, but it's extremely valuable.

We have the cost of engineering -- my father used to say it was, one time, $1,000 per lot; it's far more than that now. So each potential vacant lot that was once worth $10,000 a site, is probably worth $20,000 a site. It might be worth more than that now. So we continue to work on those, and we're ready to go when demand dictates it's time to build and sell.

Okay. And thank you for that clarity. And finally, maybe I could direct this to Gene.

You mentioned, Gene, earlier in your comments -- you refer to the Sun acquisition. And it'd be interesting to hear your thoughts on the intrinsic value of UMH Properties. As Sam mentioned, these hidden assets, so to speak, and certainly, their replacement cost, one would assume would be much higher for many of these properties you've acquired over the last several years.

But as you and Sam have been at this quite some time, I'd be interested to hear your thoughts as to the intrinsic value of UMH and how you believe the Company is positioned for the coming years.

Well as you know, I've been in the REIT industry 45 years. 30, 40 years ago, we chose what we thought the value of their Company was. But that's been, pretty much, discontinued, and we don't come up with a number. Because it's a relatively simple number. You know how many sites we have, you know how many parks we have, you know how much securities, cash and the receivables we own.

It would take a good analyst half an hour, an hour to come up with a pencil number. And we think, no matter how you look at it, UMH, at its current market price, sells at a substantial discount from its real value.

Some communities, when they announced their $1 billion, $200 million acquisition, announced that they were buying these parks substantially below replacement cost. And again, our engineers, their engineers -- they announced that the cost to build a replacement site was $75,000 a site. I don't disagree with that. It costs at least $50,000 a site, and probably $60,000 a site to build -- that does not include land and it doesn't include inherent cost of the -- it takes years to do and years to fill.

So when we buy these parks, we know we are buying them -- in these communities, when we buy them -- for $35,000, $36,000 a site. We're buying them substantially below replacement cost. And if you value UMH, you can see they it's selling substantially below the replacement cost of the communities we own.

Okay.

And lastly, Eugene, you mentioned the potential refinance of the Company. Is the growth strategy -- obviously you are synchronizing a lot of things, but is there anything magical about the 17,500 to 20,000? Does that give you a critical mass that allows you to do other things outside of, let's say, the financial efficiencies?

It's basically -- I've been very sensitive to efficiency. As you know, we invest in other REITs, and I study other REITs' administrative costs.

And UMH's administration cost is well below even the cost of small cap REITs. But it is still too large a percentage of our gross income and net income. And to be an efficient public Company, we have to get this thing up to, in my opinion -- I used to think a smaller number -- but today, I would think we have to give it up to at least 20,000 sites and be a billion-dollar REIT operate efficiently as a public Company.

It doesn't get less expensive. It gets more expensive with all the rules and regulations and accounting technicalities. It costs a lot of money to run a public Company, and we would be a much more efficient company at 20,000.

But we used to run it at 6,000, 7,000 sites. So 15,000 is better. We're going to make it even better and get it up to 20,000 and be an efficient Company.

Well thank you, Gene, Sam, Anna, for your comments today.

Thank you.

The next question will come from David Minkoff of DCM Asset Management.

Good morning, guys and gals, in this case today.

Good morning.

I'm glad to see the rental program is going well. I've been a proponent of that for a while, as you know. Of the 40 homes that you sold this quarter, how many, if any, were from rentals?

Those were primarily when -- we had the sales of homes -- those were homes that were not rentals, as a matter of fact. They were primarily--

Okay, but the push on rental is relatively new. So I guess, in the next year or two, you may see more of them converting, hopefully. Is the new sales offices going to be the ones that handle the program for rentals to buy, or is that going to be a separate thrust?

No. Each community manager already knows. Every single home we rent, the customer is offered a lease with option to purchase. And the manager actually gets a higher leasing commission if they get the lease option to purchase signed. It surprises us that 100% of the leases aren't lease option to purchase, but they're not.

And so we do quite a few lease option to purchase. And it's not a substantial number, but lease option to purchases do turn into sales. In fact, many of our sales this year are leases with option to purchase where somebody exercised their option.

Right. Well, you would think that would be, as time goes on and people living there on a rental basis longer, you would think that the sale to a rental person would be easier because they're already living in a community for awhile and, presumably, are happy there. With the proper incentive, that should be, perhaps an easier sale than a new sale to someone who's never kicked the tires in the community, right?

And we're absolutely certain of that. And not only are we certain of that, but when our customers make money -- so somebody rented the house, and at that time, the only had $5,000 in their pocket -- if at any point in time they make money, they'll buy the house. And if their income goes up and suddenly they can finance the house, they'll buy the house.

Okay.

I would point out to you today -- you may of already seen it -- in today's Wall Street Journal, there's a real estate section. And the lead article is entitled Million Dollar Trailers. And it says mobile home -- did you see that article yet, today?

Yes. I saw today.

[The one in California.]

ELS and some other communities have very expensive parks because they're waterfront parks, so they're--

Right. That was in Malibu Beach, I think.

Right.

In Malibu Beach, they give an example of a trailer that sold for $1.25 million. I thought that was interesting, that the trend is even going that way.

So the numbers, basically, are getting bigger. The revenues are going up. The expenses are going up, and the number shares are going up, of course, as well. You're financing some of these purchases with more shares outstanding.

But the per share number, unfortunately, is down a little bit. So while you're getting bigger, not necessarily getting better. Why is that? The financing rates are pretty good right now. Why isn't the efficiency of it working to our advantage, where even the per share numbers go up?

Yes. I'm absolutely positive that it will eventually. But the brilliance of the Company is the capital structure -- that there's 20 million shares, 21 million shares, and $500 million to $600 million in assets.

And what we've done with the money is, we bought properties that are going to take a little time to maximize income. And on top of that, you have a sales program that lost $2 million last year. Through the most difficult period that manufactured housing ever had, we've continued to maintain the current dividend, and we've grown dramatically.

As the upside comes -- and there's two different upsides. One is the upside in manufactured housing that we'll be a part of. And two is, because we've selectively located in the Marcellus and Utica shale area or other high-growth places like Nashville, we are really going to benefit from that.

Eventually, it is going to come directly to the shareholder. And it's going to come to the -- we look at public storage and what they did with their preferred stock and how the common was one of the best performing REIT stocks there was. And that's exactly what we're modelled after.

Very good.

Let me just -- analysts and shareholders -- you have to take a longer-term view and don't use too sharp a pencil. If, in fact, the market turns and housing is good, and we fill 3,000 vacancies, if we take our $2 million sales loss and convert that to a profit, and if we can get reasonable rent increases every year -- which cover both increased expenses and greater profits -- and you look at those numbers, those are very large numbers for this small Company. And shareholders will be very satisfied.

We went through 20 years of prosperity, where we took this Company from $1 a share to $17 a share. And we went from a $0.10 dividend to a $1 dividend.

And we just need a repeat of those conditions, which again, it's fundamentals. If the demand for housing exceeds supply, all of those things may happen. We can't guarantee it, but that's why we're in the business, and that's why we work so hard.

Fair enough. And I hope it comes to pass. I think it will. So just let it play out a little bit longer, is what you are saying.

Exactly, yes.

Very good, guys. That's all I got. Good luck.

Thank you.

The next question comes from Bruce Winter of -- go ahead, please.

Yes, thank you.

You're in the Marcellus Shale and the Utica Shale. So I've seen, on TV, pictures of the North Dakota Shale, and they're building places like yours all over the place. And there's a big public Company that has things like yours in Canada and Australia and all over the place -- huge.

So, I'm looking at the financial statement. Is there any evidence in the financial statements that this Utica Shale and Marcellus Shale is playing out for you? And secondly, is there any anecdotal evidence that you have, like some giant oil company coming in and taking 20 or 30 sites for 5 or 10 years, or whatever?

Let me answer that. Don't misunderstand. UMH is not an oil and gas play.

We have, Anna, how many acres in the Marcellus Shale? But I don't even want to get into that.

That's not what we're talking about. What Sam said -- I thought he said it very clearly -- is we have located, and we are buying parks in an area where we think there's going to be a housing boom. Not to North Dakota -- it's very exceptional, a very small population and a huge amount of revenue. But in the states we're in, which, right now, is between Pennsylvania and Ohio, we expect those states to experience unusual growth.

The online editor of the Wall Street Journal said that the Utica and Marcellus Shale discoveries and development is the major story of the decade. And we do see evidence of it now, and we see things happening.

We would like to see some great event, like they do the refinery in Monaca, Pennsylvania, for $4 billion and bring in 10,000 people to build it. But even if you don't get this colossal project, there are billions and billions of projects going on. And we don't think the press covers them to the extent.

The revenues from Pennsylvania last year, alone, was the equivalent of $500 billion. Tremendous things are actually happening now, and they're going to continue to happen.

The big companies -- you have to invest $1 billion to make $2 billion in the shale business. And the companies are putting the money in now. And we're very optimistic that we're going to get -- there will be jobs. There will be jobs in the area, and there will be jobs in Pittsburgh, and there will be jobs in Harrisburg.

And we think the future of Pennsylvania is like the proven future of Texas. And that it's going to be a great place to have the number of communities we have.

And that's why we buy parks that are 80% occupied and that don't have the greatest returns, but they're right in the heart of where we expect this development to come. That's why we do it.

And the oil and gas revenues are only incidental. We hope to pick up a few million dollars, but that's not what we're talking about. We're positioning UMH to benefit from the economic resurgence of Pennsylvania, Ohio, and those areas.

Okay. Thank you.

Thanks.

This will conclude our question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

Think 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 third quarter.

The conference is now concluded. Thank you for attending today's presentation.

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