UMH Properties Inc (UMH) 2015 Q2 法說會逐字稿

Good morning, and welcome to the UMH Properties' second-quarter 2015 conference call.

(Operator Instructions)

Please note, this event is being recorded. It is now my pleasure to introduce your host, Ms. Nelli Madden, Director of Investor Relations. Thank you, Ms. Madden. 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 our 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 our second-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 would 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, Nelli. Good morning everyone, and thank you for joining us. We are pleased to report our results for the second quarter ended June 30, 2015. Normalized FFO increased 9% for the quarter and 25% for the six months of 2015 as compared to the same period a year ago. We have continued to execute our 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've increased the number of our developed home sites by 8% over the prior-year period. During the quarter we acquired three manufactured home communities located in Pennsylvania for an aggregate cost of $8.8 million. These all-age communities total approximately 480 developed home sites situated on 180 acres. This equates to $18,000 per site, or $29,000 per occupied site, which is well below replacement cost. The weighted average occupancy rate for these communities is 63%.

Additionally, over the past five years we have more than doubled our portfolio by acquiring 64 communities totaling 8,800 developed home sites. Our portfolio is now comprised of 92 communities with 15,700 developed home sites situated on 4,600 total acres in seven states. 57% of our acreage is in the energy-rich Marcellus and Utica shale region. Shale development is fueling the revitalization of this region. Industrial development in the region is also being driven by pipeline construction to reach end consumers and gas processing plant construction. These multi-billion-dollar projects continue to move forward, despite the recent drop in oil prices.

We continue to make progress on our business model of purchasing communities in strong geographic areas below replacement cost and upgrading them. We are very excited about our previously announced agreement to acquire six manufactured home communities containing approximately 2,200 developed home sites for $68.6 million. These communities are an excellent fit to our existing portfolio, and with an average occupancy of 61% they have strong organic growth potential as we make the necessary improvements. We anticipate financing this acquisition with 10-year low-cost fixed-rate mortgages, which will result in an accretive leverage return on equity. This transaction is expected to close in two tranches over the next two quarters.

Our same-property results have continued to improve, substantially increasing the value of our communities. Following the positive trends set in our first quarter, same-property occupancy rose 90 basis points over the prior-year period. Revenue increased 8.2% and expenses decreased 50 basis points, resulting in an increase in same property NOI of 16.5% for the second quarter. For the six months, same-property NOI increased 17.8%. Our strong year-over-year same property NOI growth continues to validate our business model.

We anticipate adding an additional $100 million in communities over the next few years, which will enhance long-term value to our shareholders. Community NOI increased 18% to $8.8 million for the second quarter of 2015 as compared to $7.4 million for the same period in 2014. Overall occupancy has increased 30 basis points from 81.7% a year ago to 82% currently. Current overall occupancy reflects 2015 acquisitions of approximately 440 sites with a weighted average occupancy of 70.6%. Therefore, same-property occupancy is a more meaningful measure of demand for our sites. Same-property occupancy has increased by 30 basis points sequentially and by 90 points year over year from 82.5% in the second quarter of 2014 to 83.4% currently.

The macro-economic environment in current housing fundamentals continues to favor home rentals. Net household formations appear to be recovering from their pre-recession lows. The overall job market has strengthened. Apartment occupancy rate and rental rates continue to climb, and are now at all-time highs with the national average monthly rent for an apartment unit now at $1,155. These factors contributed to an increase in demand for affordable rental homes.

We added an additional 300 homes to our rental inventory during the first half of 2015. At quarter end, we owned approximately 2,900 rental homes, representing 18.8% of our total home sites, versus 2,100 rental homes at the end of the prior-year period, representing a 38.1% increase in rental homes. Rental home occupancy continues to be strong and is currently at 95%. Occupied rental homes now represent 21.8% of total occupied sites versus 16.9% of total occupied sites at the end of the prior-year period. We expect to add a total of 700 rental units by year end.

With regard to sales, the US home ownership rate fell to 63.4% in the second quarter of 2015 according to the US Census. This is down from 69.2% at its peak at the end of 2004. Conventional home sales have been increasing this year but first-time buyers, historically a significant percentage of new home sales, are still playing a small part in the market. Tight lending standards and slow wage growth have continued to negatively impact our sales. Sales of manufactured homes remain at low levels, with $1.6 million in homes sold this quarter as compared to [$2.4] (corrected by Company after the call) million a year ago.

Although home sales were down this quarter as compared to a year ago, subsequent to the quarter end, we are seeing strong signs of improvement. Additionally, because the prices of traditional site-built homes continue to rise, coupled with record high monthly apartment rents, the manufacturing housing value proposition today is very compelling.

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 $3.1 million, or $0.12 per diluted share for the second quarter of 2015 compared to $3.2 million, or $0.15 per diluted share for the second quarter of 2014, which included $707,000 in realized gains on the sale of securities. Normalized FFO, which excludes realized gains on the sale of securities and other non-recurring items, was $3.1 million, or $0.12 per diluted share for the second quarter of 2015, compared to $2.5 million, or $0.11 per diluted share a year ago.

Normalized FFO was $6.3 million, or $0.25 per diluted share for the six months, compared to $4.4 million, or $0.20 per diluted share a year ago, representing a 25% increase. Because the $40 million net proceeds from our recent financing which was completed at the end of the first quarter have not yet been fully deployed, Core FFO and Normalized FFO were impacted this quarter by an increase in interest expense. The proceeds from this financing will go toward funding our acquisitions, which will generate additional per share earnings accretion once they are fully deployed. Rental and related income for the quarter was $17.9 million compared to $15.8 million a year ago, representing an increase of 14%, primarily due to the acquisitions made since the prior-year period, increased occupancy rates and the addition of rental homes.

At quarter end we had 2,900 rental homes as compared to 2,100 a year ago. Same-property NOI increased 16.5% this quarter 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% of rental and related income, representing a 190 basis point improvement from the 52.9% expense ratio for the prior-year period. As we noted in the past, our expense ratio will continue to improve as we upgrade and integrate our acquisitions. Total community NOI amounted to $8.8 million for the quarter compared to $7.4 million a year ago, representing an 18% increase. Our loss from the sales operation including interest expense remained unchanged at approximately $500,000 for the quarter.

As of quarter end, our capital structure consisted of approximately $289 million in debt, of which $224 million was community-level mortgage debt and $65 million were loans payable. Almost all of our mortgage debt is fixed rate at a weighted average interest rate of 4.6% and a weighted average maturity of 6.2 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 $255 million and our $289 million in debt gives us a total market capitalization of approximately $636 million at quarter end. From a credit standpoint, our net debt to total market capitalization was 44%. Our net debt less securities to total market capitalization was 34%. Our fixed charge coverage was 1.6 times. Our net debt to EBITDA was 8.7 times and our net debt less securities to EBITDA was 6.7 times.

From a liquidity standpoint, we ended the quarter with $9 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. We also had $16 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $63 million in marketable REIT securities, representing 10.3% of our undepreciated assets. This portfolio is encumbered by $13 million in margin loans at 2% interest. Generally, 50% of the market value of REIT securities may be borrowed on margin.

After the successful completion of our recent refinancing, we are negotiating the refinancing of several of our existing communities as well as the financing of four of the to-be-acquired communities to help fund our growing acquisition pipeline. We expect to raise approximately $75 million to $80 million, providing $60 million to $65 million of net proceeds after the retirement of existing debt. We anticipate that this will have a favorable impact on FFO, given today's attractive interest rate environment and the levered returns on equity that our acquisitions will generate.

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

Thank you, Anna. UMH is on course to increase rental income from $64 million in 2014 to $75 million in 2015 and $85 million in 2016. Housing demand appears to be increasing nationwide in all areas. Factories are reporting longer lead times. It now takes six to eight weeks to buy and receive a home from the factory to our site. These lengthier time schedules delayed our rental progress in the first half of the year, but with increased demand we now anticipate 700 new units by year end, representing an increase of 200 homes from our original budget.

Our interest costs have risen as we borrow money in anticipation of use. Here again, the offsetting revenue gains will be coming in the second half of the year. Our sales loss impacts our 2015 results. We remain confident that sales will improve. UMH continues to invest in sales centers and new sales personnel. The market is strengthening, and we anticipate going from a loss to breakeven, and eventually to profitability. UMH is optimistic as to the future prospect of housing, affordable housing, and manufactured homes. 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 would now be happy to take questions.

(Operator Instructions)

Brian Hollenden, Sidoti.

Anna, you mentioned acquisition levered returns on equity. Can you give us a basic forecast of what you're looking for for the recent $68 million acquisition on equity?

Well, because I don't have the final interest rate on the financing, I don't want to give out a total number. But it will be double digit. We believe it will be double digit.

Okay, and then --

If I could add to that, the advent of Freddie Mac into the housing market, the manufacturing housing market, has been a real plus to the Company. We are very pleased with the availability of long-term financing. It's 10-year financing with a 33-year payout. And it is set at a percentage over 10-year Treasury --

Over 10-year Treasuries.

10-year Treasuries. And as you know, 10-year Treasuries are still at a relatively low level. So we anticipate a very favorable cost of funds. And of course, we budgeted a return on the investments. But as Sam pointed out in his opening remarks, we are buying these things with substantial vacancies and the real long-term gain and the accretive nature of the acquisition will depend on our filling the vacant sites.

I do want to also add that the rates that we received at the end of the first quarter, which was about 3.9%, I think going forward will probably be in the 4%, 4.25% range for the next closing.

Okay. If I could just ask a follow-up. Talking about demand, can you tell us a little bit about the demand in the Marcellus region for rentals, particularly in the quarter? And then if you could provide sort of a maybe a more longer-term outlook?

Let me begin by telling you how our past acquisitions have done, because it is really impressive. This year we have 37 communities that their rental revenues are running more than 10% over where they were a year ago. And the top five revenue increases are all acquisitions. Countryside Estates in Indiana, which we purchased in January 2012, the revenue is up 54%, or $184,000. Valley Hills in Ohio that we purchased in March 2014, revenue is up 51%, or $347,000 annualized. Holiday, which we purchased in Nashville, Tennessee in April 2013, revenue is up 34%, or $422,000. Colonial Heights, which we purchased in September 2012 in Pennsylvania, revenue -- this is just for this year, is up 29%, or $138,500. Little Chippewa that we purchased in Ohio in November 2013, revenue is up 29%, or $47,000.

So what we are finding is what we already knew. If you buy these communities, make the necessary improvements, add marketing and then add rental units, the demand is substantial. When we price the rental unit at $750 per month, we looked at what equivalent apartments are in the area. We are looking for a 20% gross return on what we paid for the house. So if we were in a market where $750 was not the number, we can use a less expensive house and we can get the rents down to $650 a month. And at that price, we are able to fill up anywhere.

This -- these quarters, we've had two additional communities achieve 100% occupancy, and the occupancy just keeps increasing. Our team out in the field is doing a fantastic job putting the homes in, getting them set-up and getting them filled with people who can and do pay the rent. It's going very well.

The only thing I would like to add to that is we are talking about 1,000 square feet of house, three bedrooms, two baths and Sam was setting a rental of $750 a month, which we think is more than reasonable and provides badly needed affordable housing.

Great. And if I could just ask one follow-up, and then I will jump back in the queue. Community operating expenses as a percent of revenue, of rental income trended down year over year to 51%. How low can you ultimately get that ratio? How should we think about that?

It's the same answer. Expenses will be 50% of revenue if we are paying the water and the sewer. If it is separately metered we can get it down to 30%. We can get expenses down to 30% of revenue. Rental units may, in fact, ultimately improve these ratios. It was only one year ago that UMH Properties decided to go from 300 rental units added in a year to 700. And we did that and achieved it. I believe that the costs when a rental unit comes vacant to upgrade it for the next resident are only going to be about $400 as you change residents, and we know 50% of the rental revenues -- rental residents stay for one year. But what I am saying is there is a possibility that the revenue from rental units will improve the ratios even beyond the 50% and the 30%, but only time will tell

Thank you.

Craig Kucera, Wunderlich.

Can you give us an update on traffic and absorption with your rental communities? With sales down considerably from last year, does that make you potentially more aggressive in putting rental units on properties to accelerate occupancy gains?

Yes, but I want to be clear about this. Our traffic is higher than ever at this moment. And for the month of July we filled more rental units than we ever did, 88 rental units. And for the month of July our sales also appear to be coming back. A year ago as everybody tried to comply with all the new laws pertaining to financing, it really stopped sales dead. And as the year's gone by and everybody's become more and more familiar with how the regulations are going to work in practice, we think we're solving a lot of those problems. And if we are able to solve those problems, I think we can do both.

So, the market for the rental units is huge. We have communities with waiting lists, we have communities that were slowed down because of rain and they could not get the homes set up fast enough. We have no communities that are receiving rental units that don't say they can fill them. We have communities achieving 100% occupancy. And now for the first time in a long time, we have some communities generating profitable sales. So all of those are very positive. And so the applications, and we created a marketing division within UMH, and the applications are at record high, and the marketing division is just getting started.

I would like to add a little something to that. This year we put in -- to date we put in 300 rental units. And overall, our occupancy of those rental units is already 95%. There is always -- to us, that's almost full occupancy. There's always some downtime on moving somebody out and moving somebody else in. But we believe that can even be a little stronger.

Got it. So in light of the fact that you're putting rental units into the ground and they are being absorbed almost as quickly as you put them in, does that make you want to put more in the ground? Or are you kind of sticking with where your prior guidance was?

No, we are going as fast as we can. 700, it's a good number, it's a good goal. But there is a possibility we will put in more rental units. Any community who fills up their rental units will get more of them until they achieve 100% occupancy. So that is what we are doing.

Got it. That's always a good problem to have, when your demand is outstripping your supply. I know you are bullish on the Marcellus and Utica. Clearly energy prices remain under pressure, because you seem to be under pressure this quarter. Do you think this opens up any opportunity for some more potentially distressed sellers, as you are able to take advantage of having access to public capital?

You mean distressed sellers of manufactured home communities?

Yes. Yes, because I mean, you found a very large portfolio back in June that was attractively priced with a lot of upside. And I guess my question is, are you seeing more of these types of opportunities out there?

We are very excited about the $68 million that we have under contract. And we are continuing to buy parks if they are available. But we have to tell you that the competition is fierce, that there are at least nine groups that I know of that are also buying communities. Our game plan when we finish the two big tranches is to buy parks on a one-off basis, and buy them from individual owners. And that's a long difficult process. But we think we can do $25 million, $50 million a year of added acquisitions from that market.

I don't want to call them distressed. Their problem is that we think nothing of spending $68 million and then putting 700 rentals in at a cost of $28 million. The mom-and-pop operators, they are hurt by the inability to sell, because of the government regulations. And they frankly do not have $100,000, $200,000, $300,000 to buy rental units. So they do not have the ability to move ahead with the property that we do. And as they get older and the prices are pretty good right now, we can hopefully continue to buy parks on a one-off basis.

Okay. Great. Thanks, guys.

Joe Valdrini, Bank of America Merrill Lynch.

Just a really quick question. At the current pace of share dilution, how long do you envision that staying at the current rate?

I don't call it share dilution at all. We've gone from 7,000 sites to 15,200 sites. We are going to 17,000 sites. Sam and the team are buying sites now at a very substantial discount from their replacement cost.

Now unfortunately our share price is not where we would like it to be, and we have been selling shares at a discount. But we've been using the proceeds to buy assets at a discount. And we've been creating a much stronger, better Company, a more efficient Company and a more valuable Company. We are discussing now changing our view and stopping the sale of equity, and going toward perhaps preferred stock. But again, as I started my conversation, it is simply amazing what we are doing on the debt side. I mean, the ability to borrow 70%, 75% of these acquisitions at 4% or 4.25% for 30 years is a big plus and allows us to grow without further sale of stock.

So we are well aware that we don't want to sell more equity. And we are also aware that we have very good bank lines and we are trying to -- we are discussing whether we can do a preferred issue. And when people look at that, they want the earnings to be better, and we think the earnings are going to be better. And so we will be able to shift from any sale of equity, hopefully to preferred stock. But it really depends on a continuation of the improvements that we see for the year to date, and what we think will go on at a faster rate for the second half.

Thank you. That's all.

Michael Boulegeris, Boulegeris investments.

Sam, do you -- would it be a bridge too far to suggest that your same-site occupancy can, by year end, be over 84%? Is that doable, do you -- I mean, reasonable?

84% is just another 100 --

200 basis points.

200 basis points. Here is what I know. The important -- I don't know the exact percentage, but I know that when we add 700 rental units we increase revenue $5.6 million. And to the extent we have move-outs, right, because in some of the communities that we've purchased -- the move-outs are primarily obsolete homes. And so you are you losing a house that paid rent at $400 and you are gaining a rental unit at $750. So the revenue end, we are raising rents 4% and we are increasing rental units 700 units. And Anna is telling me that we need to increase 260 sites. We can increase 260 sites. The answer is to your question is yes. (Laughter). We can get to the percentage you are asking for.

We will try

I did not want to say yes until I knew the answer. The answer is yes.

We appreciate that. Thank you. Moving along, your securities portfolio seemed relatively stable during the quarter. Is that because you're more invested in the preferreds in terms of the actual securities?

The securities portfolio, people may be surprised with the recent decline when I tell you we are very happy with it. The preferred has held up amazingly well. We have $18 million in preferred and we have about $45 million to $48 million in common. I've listened to every conference call on every individual REIT we have, and every conference call indicates a strengthening real estate market. The fundamentals are getting better. The REIT investors are very concerned about rising interest rates, and there may be other reasons for the sell-off. But you have a situation where share prices are going down and results are improving.

And so that condition cannot continue indefinitely. At someplace the continuing rise in performance will be reflected in stock prices. I'm very optimistic about our REIT securities portfolio. And I have to remind everybody that we make $4.2 million a year on dividends, and there is not one company that the dividend is in danger at all. And so we think that $4.2 million is a good base.

So I don't want to say we are pleased with the performance, because it has drifted off. We had gains and now we have some very, very small losses. But we think it's a fundamental part of our capital structure. And that, I don't want to say long-term prospects, the prospects for the 2015/2016 are very good for the portfolio.

Thank you, Gene. And in terms of -- maybe Sam, could you provide us an update in terms of any plans that you are moving -- advancing now in terms of undeveloped acreage that you want to move forward and develop?

Sure. We are having hearings right at this moment. We are in the Saratoga, New York area seeking final approval on 60 lots. We are still working on the Coxsackie project 18 miles South of Albany where we own [220] (corrected by Company after the call) acres of vacant land, 0.25 mile from the Hudson River and 0.5 hour from Hunter Mountain. And it's a beautiful, flat property, and we bought it zoned to allow 330 manufactured homes on 110 acres. We've been fighting the battle for 10 years. So one of the things we know, the value of purchasing the vacant sites we are purchasing today is substantial because the approval process is such a nightmare.

But even though it is a nightmare, we are working on our approvals in Vineland, New Jersey. We are working on rebuilding Memphis Mobile City right now. We have the community Holiday outside Nashville where we can put just 14 double-wides, but we can also add another 60 homes. We are working on all of these expansions, because expansions can be extremely profitable, with the sale of the house almost paying for the construction of the lot. And then you can collect the lot rent forever after.

So we think one of the great unknowns to other people about what we are doing is the value of the vacant sites. If you've been through the approval process and you know the costs of the engineering, the cost of the legal and the uncertainty. And then you look at the fact that we can buy a 70% occupied community and know exactly what we paid for the vacant sites, and they are there and nobody can take them away from you, that has incredible value. But we like the expansions also because after you go through the work, they are in locations where you expect to earn a sales profit plus the lot rent.

It seems like your points for qualitative growth, and it's finally starting to really get traction. Finally, the regulatory climate. I don't know if this F-682 would affect UMH, but as it moves, I guess, over to the Senate. But are there any comments, stepping back, that maybe you will see some -- are you hopeful that maybe you will see some modifications to Dodd-Frank that would be helpful?

We are very hopeful of that, but at the same time we already -- we were audited by the State on our Safe Act Dodd-Frank compliance, and we did fine. As other firms, like 21st, become more familiar with compliance, people are easing up the standards a little bit. And that helps tremendously. And so yes, we still want the law changed, and MHI, the Manufactured Housing Institute is working on it at this moment. But just in the last 60 days we have had discussions about the meaning of the law, and people have agreed that there was more opportunity than we were taking advantage of back in January. The number of applications that come in that are being approved is going up now.

But I have to add, the situation, I don't know how we ever -- the country ever got into this. But for the wealthy people, the jumbo mortgages which were 4% of the market are now 20% of the market. So we are doing 5 times in the country, the million-dollar homes. And on the affordable end of it, they have really stopped the lower income people from buying homes. And frankly, I think it's going to prove to be bad politics because if you deny a person the right to buy a home and the home goes up 8% a year and ultimately goes up 50%, they are not going to thank people for the fact that we were forced to turn them down when Sam and I thought that they had sufficient income, and the regulations prohibited us from making the loan.

And just if I could ask one last question. Maybe, I think Anna or Gene, you mentioned that the rental income growth, $64 million to $75 million to $85 million, so year over year you're looking at 17%, 13%. Certainly, maybe Gene as Chairman, as UMH really starts to consolidate these new acquisitions and growth firms up, that bodes well for the security of the dividend, I would venture to guess.

We don't like to say the dividend is secure. We have a gap of $5 million. And we think that between sales and occupancy and rent increases and all the prospects you've heard today on this call, that is not a very big gap and we will close that gap. And so we see no reason to cut the dividend at the present time and then find that earnings are going ahead to the extent that the dividend will be covered. But like all future representations, it is up to the Board of Directors to declare the dividends, and we are dependent on the fact that the rosy prospects we have outlined today actually turn out to be the way we think they are.

On the top line, the numbers are fairly well set. We did $64 million in 2014. We will do $72 million in 2015. And with the acquisition and the rentals going in, we will do $85 million in 2016. And if we keep the 50% margin, we are very optimistic that this is going to be a much more valuable Company in 2016 and 2017, and we are very pleased with the top-line progress. And now we have to make the bottom-line progress fall into line with our gross revenue increases.

Fair enough. Thank you very much.

Thank you.

This concludes our question-and-answer session. I would 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 questions. We look forward to reporting back to you after our third quarter.

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