UMH Properties Inc (UMH) 2015 Q1 法說會逐字稿

Good morning and welcome to UMH Properties first-quarter 2015 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. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited quarterly supplemental information presentation. This supplemental information presentation, along with the 10-Q, are available on the Company's website at umh.com.

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 first-quarter 2015 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 quarter ended March 31, 2015.

UMH continued to execute its growth strategy of using debt, preferred stock and equity raised through our dividend reinvestment plan to purchase well-located communities in our target markets, including the energy-rich Marcellus and Utica shale regions. We have increased the number of our developed home sites by 5% over the prior-year period.

During the quarter we acquired one manufactured home community containing 141 developed home sites in Erie, Pennsylvania for a purchase price of $3,800,000. Subsequent to quarter end we acquired two additional communities containing a total of 324 developed home sites in Western Pennsylvania for an aggregate purchase price of $5,300,000.

Over the past five years we have more than doubled our portfolio by acquiring a total of 63 communities containing over 8,600 developed home sites. With the two communities acquired subsequent to quarter end, our portfolio is now comprised of 91 communities with 15,500 developed home sites located throughout seven states.

We continue to seek acquisitions in our target market. And in addition to the acquisitions completed in 2015 thus far we have a definitive agreement to purchase one manufactured home community in Mountaintop, Pennsylvania containing 158 developed home sites for approximately $3.5 million. This acquisition is anticipated to close during the second quarter of 2015.

We are currently in various stages of negotiations for additional community acquisitions. Our business model is to purchase communities in strong geographic areas, make appropriate capital improvements including rental homes, add sales staff and marketing, and thereby increase income and occupancy. We believe our business plan has substantially increased the value of these communities, as demonstrated by our same-store results.

Over the prior-year period, same-store occupancy rose 1.3%, revenue increased 8.2%, and expenses decreased 0.9%, resulting in an increase in same-store community NOI of 19.2%. Our year-over-year same-store NOI growth of nearly 20% represents solid evidence that our ongoing program of acquiring communities and upgrading them is working. 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 high standards we are confident that these transactions will have a continued impact in delivering long-term value to our shareholders. Community NOI increased 28% to $8.4 million for the first quarter of 2015 as compared to $6.6 million for the same period in 2014.

Overall occupancy increased 150 basis points from 80.8% in the first quarter of 2014 to 82.3% currently. Same-store occupancy increased 130 basis points from 81.7% to 83% currently.

Occupancy increases continue to be driven by home rentals. We are expanding our rental program and have added an additional 120 rental homes to our communities during the recent quarter, bringing the total to approximately 2,700 rental homes. Over the past two years we've added approximately 1,600 rental homes to our communities.

Occupancy in rental homes continues to be strong and is currently 92%. Occupied rental homes now represent approximately 20.4% of total occupied home sites at quarter end.

Our sales of manufactured homes remain at low levels with $1.1 million in homes sold this past quarter as compared to $1 million in 2014. Because the median price for an existing single family home is over $200,000 compared to approximately $65,000 for a manufactured home, coupled with the recent double-digit angle of rental increases associated with the apartment sector, we remain optimistic about improved sales for our property type, given the basic need for quality affordable housing. The S&P Case-Shiller national index has seen 34 consecutive months with positive year-over-year gain.

As prices of traditional site-built homes continue to rise households need to look for more affordable solutions. Today's manufactured homes can deliver outstanding quality and performance in the face of this continued widening of the housing affordability gap.

Our substantial expansion acreage provides us with the ability to increase our total sites as housing demand increases. Given UMH's geographic concentration in some of the most energy-rich areas of the world, we anticipate that there will be strong long-term demand for our sites.

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

Thank you, Sam. Core funds from operations, or core FFO, was $3.2 million or $0.13 per diluted share for the first quarter of 2015 compared to $2.4 million or $0.11 per diluted share for the prior-year period. Normalized FFO was $3.2 million or $0.13 per diluted share for the first quarter of 2015 compared to $1.9 million or $0.09 per diluted share in the prior-year period, representing an increase of 44% on a per-share basis. Normalized FFO excludes securities gains and losses and $125,000 in 2015 for the one-time payment to our insurance company for our contribution towards a settlement of the Memphis Mobile City lawsuit.

Rental and related income for the quarter increased by 16% from $14.8 million in 2014 to $17.2 million in 2015. This increase was primarily due to the acquisition of 15 communities in 2014 and 2015, the addition of rental units and the growth in occupancy. As Sam mentioned, same-store community NOI increased 19.2% over the prior-year period, driven by increases in rental revenue, reduced expenses and occupancy gains.

Total community operating expenses for the quarter were 51.2% of rental and related income, representing a 460 basis point improvement over the prior-year period. As we noted in the past, our expense ratio will continue to improve as we upgrade and integrate our acquisitions.

Our loss from the sales operation, including interest expense, remains stable at approximately $600,000. This loss includes costs associated with our sales centers. We believe that over the long term these sales centers will have the potential to generate meaningful positive results.

We have continued to strengthen our balance sheet. As of the end of the quarter our capital structure consisted of approximately $270 million in debt, of which $222 million was community level mortgage debt and $48 million were loans payable. 83.7% of our total debt is fixed rate.

The weighted average interest rate on our total debt is 4.5%. 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 $254 million, and our $270 million in debt, results in a total market capitalization of approximately $616 million at quarter end.

From a credit standpoint our net debt to total market capitalization was 42%. Our net debt less securities to total market capitalization was 30.9%. Our fixed charge coverage was 1.7 times. Our net debt to EBITDA was 8.1 times. And our net debt less securities to EBITDA was 6 times.

From a liquidity standpoint we ended the quarter with $11.1 million in cash and cash equivalents and $5 million available on our credit facility, with an additional $15 million potentially available pursuant to an accordion feature. We also had $16.9 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory.

In addition, we held $67.9 million in marketable REIT securities encumbered by $1.4 million in margin loans at 2% interest. Generally 50% of the market value of our REIT securities may be borrowed on margin. We intend to limit the securities portfolio to be no more than approximately 15% of our undepreciated assets. At the end of the quarter we had $5.5 million in net unrealized gains on our securities investments.

To further enhance our liquidity UMH has successfully completed our previously announced financings. We obtained 10 Freddie Mac mortgage loans for total proceeds of approximately $57.7 million, including one loan which closed on April 1, 2015. These loans have 10-year maturities and principal repayments based on 30-year amortization schedules.

Interest on these mortgages are at a weighted average fixed rate of 3.87%. The entrance of Freddie Mac into our sector has greatly increased the availability of debt capital. Their favorable financing terms will allow us to continue to refinance our communities and execute our growth strategy for the long-term benefits of our shareholders.

And now let me turn it over to Gene before we open it up for questions.

Thank you, Anna. As Founder and Chairman of the Board of Directors, I am proud of the substantial progress UMH has made in its operational business plan. Our communities are strategically very well located.

We are taking advantage of the economic and population growth that has resulted from the oil and gas deposits in Pennsylvania and Ohio. We are taking advantage of the strong need for quality affordable housing through our rental housing program. We're taking advantage of the availability of debt capital and favorable financing terms, which allow us to realize property values.

Our management team has demonstrated the capabilities necessary to integrate and maximize the performance of our communities. UMH believes in the manufactured housing sector. My letter to shareholders, which I urge you to read, discusses the strength and future of our industry. With the anticipated growth of our per-share earnings and the favorable developments previously discussed, management will recommend to the Board of Directors the continuation of our current $0.18 a quarter, or $0.72 annual, per share cash distribution.

We will now be happy to take your questions.

(Operator Instructions)

Brian Hollenden, Sidoti.

Good morning, guys, and thanks for taking my call. Can you talk about rent increases? What was the weighted average home site rent and how does that compare to last year? And, more importantly, what are you expecting for the year ahead?

If you look at our same-store figures the weighted average monthly rent as of the end of 2014 was about $398. And at the end of the quarter 2015 was $413, which is about a 3%, 4% increase/ And we expect that we will be increasing rents throughout the whole portfolio around 3% to 4% for the coming year.

If I can add to that our policy for 2015 was to increase rents on the sites alone at 4%. And our other policy was to put rental units in with a budget of 500 rental units to add to the portfolio so that the top line for UMH is $72 million rental revenue as compared to $64 million in 2014. That is, we are anticipating an $8 million gain this year. And we already know the numbers up to May, through the May charges, so we think we're right on schedule to increase our rental revenues to $72 million for 2015. That does not include any acquisitions that may come down the road.

Thanks. That's helpful. Can you talk a little bit about demand? Specifically, the drop in oil, any negative impact on demand? And what can you point to, to show that the oil price drop has not been negatively affecting demand?

Throughout the Pennsylvania and Ohio region the projects that are going on are the installation of the pipeline. The pipelines are going to create additional uses for the natural gas which will again result in traditional drilling. But even though they have cut back on drilling there is no cut back in the pipeline projects.

And I think I pointed out on the last call that when you're in Harrisburg, Pennsylvania you see pipeline piled up like storage containers near the New Jersey ports. So, the pipeline projects are going forward. Those people need housing. They are moving. They get the workers from Texas, from Louisiana. And our rental demand is extraordinary.

We actually added 808 rental units in 2014, and so far in 2015 we've ordered 295 new units. Demand is extraordinary. I just talked about Pennsylvania and Ohio but manufacturing coming back in Indiana, and then Nashville has been a great market for us, and New Jersey is very strong, too. So, demand is exceptionally strong on the rental units.

And if I could just ask a follow-up to that, same-store occupancy was up about 130 basis points to 83%. Is that all driven by the rental units and then filling those up? And do you expect that similar 130 basis points or so pace for the next 12 months?

Yes. I'd say that, a long time ago my father took me to the World's Fair looking for a better product and a better business. This was all the way back in 1967. We found a better business and a better product. It's manufactured homes as rental units.

No apartment builder can compete with us. Their costs are $150,000, at least, for a 1,000-square-foot unit. Our cost is $40,000 for a 1,000-square-foot unit. We can monitor demand every month. We put in five rental units, if they fill up, we add another five.

We don't have to wait for new approvals. You just apply for the building permit, which you are legally entitled to, get the permit, pour the pad, order the house. 6 to 8 weeks we have the 1,000 square feet ready to rent.

I'll just read you something, our top five revenue percentage increases during the year 2014. Countryside Village in Tennessee went up 42%, which is $429,000 per year. City View, it's a Pennsylvania community, went up 39%, $71,000. Colonial Heights 32%, $144,000. Holiday Manor in Nashville 29%, $338,000. Another Country Side Estate, 27%, $97,200. We had 25 communities increase revenue by 10% or more year over year.

Thank you. And if I could just ask one last question and I'll jump back into the queue. On the acquisition front, can you just talk a little bit about -- I know you don't talk directly about cap rates -- but what you are seeing compared to last year in terms of rates? And, then, who you're running into in terms of competitors when you're looking at some of these deals. Thank you.

That's the most difficult question to answer because we're in the middle of negotiations now. And we're very optimistic that we can do $50 million, $60 million. Our goal is $100 million in acquisitions.

There were two types of acquisitions. We do what we call one-off acquisitions where we're dealing with an individual owner. They're the most difficult negotiations but we're willing to go out and do the work to buy a single 150, 250 space park from one owner, even though it takes much more work than buying a portfolio.

But we are also very bullish on the overall industry, as Sam just pointed out. We think that the rental homes, the three bedrooms, two baths, 1,000, renting for $800 a month is very competitive. And that we are able to improve these parks by putting the rental units in.

So, we are negotiating to buy larger packages of parks to install rental units in there. But I really don't want to get into what we call the shadow pipeline because until we have a signed contract we really can't comment on the negotiations.

Okay. Thank you.

Craig Kucera, Wunderlich.

Hello, thanks. A lot of my questions were covered. I think you answered my question which was really what's your baseline expectation for acquisitions this year. Is it probably $50 million, $60 million on the community side?

Yes. Again, we don't have the signed contracts We're optimistic, though, based on a number of deals we're looking at, the people we're dealing with; but we just have to wait until we have signed contracts and then we'll announce what we're doing.

But we are optimistic that we can. We've grown the Company from 8,000 sites to 15,500. And we're convinced we can take it to 18,500 and then to 20,000 sites.

Got it. And on the rental side is the expectation, it looks like you spent almost $7 million in the first quarter, are you still expecting to spend about that much a quarter, call it $5 million to $7 million?

Yes. I'm just thinking about your numbers. 500 times $40,000 is $20 million. I'm hoping we do 700 and maybe more. The demand is that strong at $40,000 a site.

I just wanted to mention something on the acquisitions, we have an incredible competitive advantage because of the great mortgages we've received through Freddie Mac. And they told us the story how they had six applications that they were ready to approve on the numbers, from six different community owners. But when they inspected the communities we were the only one they gave the mortgage to because they were so impressed with the condition and the quality of the community.

What we're doing is we're acquiring these communities and upgrading them so we can get the lower-priced mortgage, which we'll be able to do after we install the rental units. Freddie Mac changed the rental unit criteria. You used to be limited to 5%. Now it's 25% and you can get waivers. So, we're in very good shape having that advantage and it's going to help with our acquisitions.

Got it. And when you think about the demand, the traffic coming through the door, that you're able to put into rentals, is there any advantage to doing a little more, call it, spec rental units? Or are you just really trying to match on a real-time basis traffic and potential renters versus what you are spending.

There are locations where we do make the decision to put in 10 rentals at a time because the demand is so strong. But that's the exception just because we check the occupancy every month and we don't like to see vacant rental units. So, if I put in 10 and we only fill 5 it distorts the numbers. So, I have to try to match it as best we can.

The other thing you should be aware of with rental units that we were concerned about, what would it do to receivables. But I check the receivables every month, too, and our rent collection is just as good as ever and the rental units are not causing any receivable problems.

And also, if I may add, in order to get a rental unit in, it doesn't take years to do. It only takes a few months from the time of ordering to the time of having it set up and ready for occupancy. So, there is no time lag in that, so it's not too much of an advantage to order more than we need.

I see. Okay. Is there any seasonality that you find? Is it like in the regular apartment business where you do see a lift in traffic count and just people that have an interest in renting at different points in the year?

Sure. Families with children want to be relocated before the school year begins, and so they'll slow down after the school year starts. Less people move during the winter because it's more difficult. But even through those periods we've had very strong move-ins and very strong occupancy.

Okay. Great. I'll get back into queue.

Paula Poskon, D.A. Davidson.

Thanks. Good morning, everyone. Just a question for Sam. Correct me if I'm wrong, I think I jotted this down from your prepared remarks, Sam, that the rental business now represents a little over 24% of your portfolio. Is that correct?

20.4%.

Okay. And if you believe, as I do, that I'm bullish on the rental sector, what ratio are you comfortable capping that? Or would you be comfortable with an entirely rental portfolio? Where is the optimal point there?

The way I look at it is more community by community than particularly as a portfolio, because there are communities and expansions that were really built strictly for multi-section homes that are for sale. If the community has a clubhouse, swimming pool, it's more likely that it's multi-section sales occupancy and not such a rental community. So, in those communities you might be putting in 10% rental units. And based on current occupancy that could be all there is room for, is 10% rental occupancy.

But then you have other communities that were built as single-section workforce housing where rentals are the solution and the answer. And I wouldn't care if they were 100% rental occupancy. That is what the people want. That is what they take. And there's nothing wrong with rental occupancy there.

So, we go community by community. I'm aware of the mortgage constraints on rental units. But my personal feeling, and this goes back to before Freddie Mac was allowing the rental units, I always felt that if we showed that rental units will last for 40-plus years, and that on a $40,000 investment we're going to collect $48,000 times 40 years, and the home's going to last that long and everything's going to work, then eventually the lenders would recognize that and they'd lend towards it -- which is exactly what's occurring.

So, I think at some point -- my father talks about someday we're going to build a 100% rental manufactured home community because the business is that good.

All right. Thanks. That's all I have.

Joe Valdrini, Merrill Lynch.

Good morning, everyone. I just have one quick question. Can you speak to the share dilution recently and how the pace of that you see going forward?

Another difficult question. My personal view is that we want to switch from issuing any equity and issue solely preferred stock and use the availability of first mortgage debt through Freddie Mac. In order to issue a preferred issue, we need to get our earnings up.

And the other thing we need to do is we very much want to get on the MSCI index. The smallest company on the MSCI index is $325 million. UMH is getting close to that point. So, there are strong reasons for continuing to issue some equity until we can get the $325 million, $350 million market cap. But we don't want to continue to issue common shares other than for the reasons I stated.

The other issue is that we may find an opportunity to make a major acquisition. And if you're going to make a major acquisition of $50 million or $100 million, we might have to raise a small amount of equity. But, again, you're talking 5% to 10% of the outstanding here, you're not talking about selling 20% of the company. We think the Company is more valuable. The shares are undervalued and selling stock at the present price has a major disadvantage because we're selling stock below what we think the value of it is.

But, again, there's some offsetting considerations and in small amounts we might continue to sell a little equity. But eventually I would like the Company, as a policy, to use first mortgage debt through Freddie Mac and to become one of the major issuers of preferred shares.

Great. Thank you. That's all I have.

(Operator Instructions)

Michael Boulegeris, Boulegeris Investments.

Good morning. Thank you for taking my questions. Sam, it seems like sequentially income just fell a little and the overall occupancy was flat. Is that just turbulence, inter-quarter turbulence, or is there something more there?

Hi, it is Anna. On the earnings side, don't forget that quarter one is always the quarter where you have some expenses relating to snow removal and to various other things. And in this quarter especially, we also have the Memphis Mobile City litigation settlement which was $125,000. We didn't have that in Q4.

I see. And maybe, Gene or Sam, in terms of the REIT portfolio, it appears it is doing very well. Is that perhaps something you might consider drawing down incrementally? You've always indicated that it does provide some liquidity during market duress. Have your thoughts changed about that at all given the share dilution?

You talk about the idea, has it changed. The REIT portfolio is there for liquidity and liquidity and liquidity. It also provides us with an extra source of income. We're very pleased with the portfolio we have based on the reporting companies that are reporting excellent earnings.

But our plan is to reduce the securities portfolio if we get the opportunity to buy a large portfolio of communities. So, we might take the preferred stock, for example, down to zero and raise $18 million by selling the preferred stock. But if we're going to do $50 million or $100 million in acquisitions we will use every source of capital we have because we won't do the acquisitions unless we have three different ways of financing it. We're very conservative.

Fair enough. And from a strategic standpoint, in terms of future growth, have you thought at all about perhaps selling some of your communities that may not appear to be strategic? I see you have one all the way out in Michigan. But have your thoughts changed at all in that regard?

No, not at all. We're not sellers of parks. I don't know how the other REITs get so many non-core properties. Every property we have that we bought, some do better than others, but we're bullish about the long-term prospects for all the communities. In the 40-some-year history I sold one park in Lancaster because the Pennsylvania Dutch, who lived next door, insisted on buying it. Otherwise, I've never been a seller.

Thank you.

This concludes our question-and-answer session. I would like to turn the call 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 hope to see you at NAREIT's REIT Week event in June. And we look forward to reporting back to you after our second quarter. Thank you.

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