UMH Properties Inc (UMH) 2015 Q4 法說會逐字稿

Good morning and welcome to the UMH Properties fourth-quarter and year-end 2015 earnings conference call.

(Operator Instructions)

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

Thank you very much, operator. In addition to the 10-K that we filed with the SEC yesterday, we have filed an unaudited annual and fourth quarter supplemental information presentation. This supplemental information presentation along with our 10-K are available on the Company's website at www.umh.reit.

I'd like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations, and involve various risks and uncertainties. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can provide no assurance that its expectations will be achieved.

The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the Company's annual 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, Vice President and Chief Financial Officer. It is now my pleasure to turn the call over to UMH's President and Chief Executive Officer, Samuel Landy.

Thanks very much, Nelli. Good morning, everyone, and thank you for joining us. We are pleased to report our results for the year ended December 31, 2015.

UMH continues to produce strong results. Normalized FFO per diluted share increased by 15% from $0.48 per diluted share in 2014 to $0.55 per diluted share in 2015. This marks the second consecutive year of solid double-digit growth.

We have achieved this from both the acquisition and integration of our new communities, as well as through strong organic growth. Same-property revenue increased 9% year over year, driven by increased rents and same-property occupancy gains of 70 basis points. Because same-property expenses only increased by 0.4%, we generated substantial same-property NOI growth of 17%.

UMH made further advancements in our growth strategy of using debt, preferred stock, and equity raised through the DRIP and SIP to purchase well-located communities in our target markets. We believe this strategy will continue to result in increased funds from operations per share, and should also result in substantial price appreciation over time.

During the year, we acquired 10 manufactured home communities containing approximately 2,800 developed homesites for a total purchase price of $81.2 million. This represents an 18% increase in total homesites over the prior year.

Over the past six years, we have more than doubled our portfolio by acquiring and successfully integrating a total of 70 communities containing almost 11,000 developed homesites. Our portfolio is now comprised of 98 communities with 17,800 developed homesites located throughout seven states.

During this time, the prices for well-located communities have risen substantially. Competition has increased, and consequently, the value of our portfolio has risen. We continue to seek acquisitions in our target markets, including the Marcellus and Utica Shale regions of Ohio and Pennsylvania.

Our growth strategy is to purchase communities in strong geographic areas below replacement cost, upgrade them, and add rental homes, sales staff, and marketing, thereby increasing income and occupancy. 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 favorable impact in delivering long-term value to our shareholders.

We believe our business plan has substantially increased the value of our current portfolio, and will continue to do so. The recent drop in energy prices have reduced shale drilling for the moment.

However, industrial development in the Marcellus and Utica Shale regions 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 low prices. Additionally, after a 40-year ban, the US has begun to ship American oil and liquefied natural gas overseas, increasing demand.

With regards to occupancy, our same-property occupancy rate increased to 83.9% at year end as compared to 83.2% in the prior year. Given the substantial amount of acquisitions we've been doing, same-property occupancy is a more meaningful metric to gauge the demand we are seeing. This demand continues to be driven by home rentals.

A modern manufactured home is an attractive and affordable form of rental housing. Over the past two years, we have added approximately 2,000 rental units to our communities. At year end, we had a total of 3,700 rental units.

Occupancy in rental units continues to be strong, and has increased from 91.5% at the end of 2014 to 92.9% currently. Much of the existing vacancies are related to the time it takes to set up homes after they are purchased, or to upgrading rental units acquired in acquisitions. Occupied rental units now represent approximately 25% of total occupied sites.

Our sales of manufactured homes remain at low levels, with $6.8 million in homes sold this past year as compared to $7.5 million in 2014. Total homes sold in 2015 were 135 homes compared to 134 homes sold in 2014. Nevertheless, we continue to be optimistic about future sales.

Single-family conventional home prices have risen by 5.4% to a median price of $213,800 over the prior year. Apartment rental rates have continued to rise as well, increasing 4.8% to an average monthly rate of $1,244 from one year ago. Therefore today, the manufactured home property type offers substantial comparative value that should result in increased demand going forward.

In 2015, manufactured home shipments increased 9.6%. In January 2016, production increased 17.9% from January 2015. We anticipate that this trend will continue through 2016, given the basic need for quality affordable housing. We believe our vacant lots and our developable land are valuable assets that will earn significant income as housing demand increases.

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

Thank you, Sam.

Core funds from operations, or core FFO, was $3.9 million or $0.14 per diluted share for the fourth quarter of 2015 compared to $3.8 million or $0.16 per diluted share for the fourth quarter of 2014. Normalized FFO, which excludes realized gains on the sale of securities and other non-recurring items, was $3.8 million or $0.14 per diluted share for the fourth quarter of 2015 as compared to $3.5 million or $0.15 per diluted share in the prior-year period.

For the full year 2015, core FFO was $14.3 million or $0.55 per diluted share, compared to $12.3 million or $0.55 per diluted share in 2014. For the full year of 2015, normalized FFO was $14.2 million or $0.55 per diluted share, compared to $10.8 million or $0.48 per diluted share in the prior year, representing an increase of 15% on a per-share basis.

Our per-share results for the fourth quarter of 2015 were impacted by approximately $0.03, due to our recent preferred equity offering completed in October of this year. As the proceeds from this offering become fully invested, our results will be favorably impacted.

Rental and related income for the quarter was $20.6 million compared to $16.9 million a year ago, representing an increase of 22%. For the full year, rental and related income was $74.8 million as compared to $63.9 million for 2014, resulting in an increase of 17%.

These increases were primarily due to our acquisitions, the addition of rental homes, and the growth in occupancy. As Sam mentioned, at year end, we had 3,700 rental homes as compared to 2,600 a year ago, representing a 42% increase.

Total community operating expenses for the quarter were 47.3% of rental and related income, representing a 210-basis point improvement from the 49.4% for the prior-year period. For the year, our expense ratio was 49.6% compared to 52.6% for 2014. As we noted in the past, our expense ratio will continue to improve as we upgrade and integrate our acquisitions and increase our occupancy rate and rental income.

Community NOI amounted to $10.9 million for the quarter compared to $8.6 million a year ago, representing a 27% increase. For the full year, community NOI amounted to $37.7 million compared to $30.3 million for 2014, representing a 24% increase. Our loss from the sales operation, including interest expense, remained relatively stable at $1.9 million for both 2015 and 2014.

As of year end, our capital structure consisted of approximately $345 million in debt, of which $287 million was community level mortgage debt, and $58 million were loans payable. 99.8% of our mortgage debt is fixed rate.

During the fourth quarter, we issued a new 8% series B perpetual preferred stock that generated approximately $43 million in net proceeds. This, combined with our series A preferred shares, resulted in a total of $137 million in perpetual preferred equity at year end. Our total preferred stock, combined with an equity market capitalization of $274 million and our $345 million in debt, results in a total market capitalization of approximately $756 million at year end.

From a credit standpoint, our net debt to total market capitalization was 45%. Our net debt less securities to total market capitalization was 35%.

Our fixed charge coverage was 1.7 times. Our net debt to EBITDA was 9.3 times, and our net debt less securities to EBITDA was 7.2 times. Although these leverage ratios are higher than where we ultimately want to be, our current vacancy factor of approximately 20% will give us the operational leverage to organically improve our credit metrics substantially.

From a liquidity standpoint, we ended the year with $6.5 million in cash and cash equivalents and $20 million available on our credit facility, with an additional $15 million potentially available pursuant to an accordion feature.

We also had $10.4 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $75 million in marketable REIT securities encumbered by $15.8 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 gross assets.

Over the past year, UMH has taken advantage of the unprecedented low long-term mortgage rates. We have obtained 21 new mortgage loans totaling $139 million, $107 million net after the retirement of existing mortgages.

These loans were at a weighted average interest rate of 4%. This has reduced our weighted-average rate on our mortgage debt from 4.8% at December 31, 2014 to 4.5% currently, while increasing the weighted average maturity from 5.2 years to 7.1 years.

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

Thank you, Anna.

As Founder and Chairman of the Board of Directors, I am proud of the substantial progress our UMH team has made this year. We have delivered strong double-digit normalized FFO growth for the second consecutive year.

We have acquired and integrated 10 communities, increasing our portfolio of developed homesites by 18%. We have increased our rental home portfolio by 42%. Same property metrics continue to improve, with same-property NOI increasing by 17%.

We have realized growth in individual property values through refinancing, adding over $100 million to our investment capital base. We've accessed the capital markets through our recent preferred issuance, which allows us to continue the substantial growth we have achieved.

The primary function of our REIT securities portfolio is to enhance our balance sheet liquidity. This past year, our portfolio generated $4.4 million in income. Our securities investments have also delivered substantial realized gains. Over the past five years, our net realized gains totaled $12.6 million.

We are very pleased with our current holdings, and anticipate excellent performance going forward. The housing recovery is expected to be resilient, given the low interest rate environment, the pent up demand and the expected continued increase in prices.

Low energy prices, coupled with strong employment numbers, benefit UMH and our residents. Given all these positive trends, 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 questions.

(Operator Instructions)

And our first question will come from Craig Kucera of Wunderlich.

Hey, good morning, guys.

Good morning, Craig.

I may have missed this, but did you guys discuss your capital spending plan for the next year? I think you did about 1,100 units last year, 900 the year before. What are you thinking this year makes sense?

Okay, so we're going to add 800 rental units for $32 million. Additionally, with the acquisitions, the capital budget for improvement to the acquired communities is much higher than normal, but will be about $15 million. So that's the capital budget.

Got it. Is there a reason that -- just given the ability to really drive same store, is there a reason that you're slowing down the rental unit purchases and implementation, or is it just where you're starting at this point in the year?

No, we don't think we're slowing down at all. We think adding 800 units is on pace with what we planned last year. If it goes better, it goes better. But we judge the demand at each community every month. The people are filling rental units just as quickly as we put them in. And everybody we talk to is extremely optimistic about our ability to add 800 rental units during the course of the year, and fill 800 units.

I'll add to that, that we put in 200 units before the end of the year that were not occupied because they were being completed. And those 200 should become occupied in the very near future. So you'll get 10 to 12 months' revenue on that, and the other 600 -- other 800 units we'll add this year, the revenue grows throughout the year. You don't get the full 12 months.

Got it. And we think about longer term with the portfolio, I think you mentioned that about 25% was currently rental. I know there are some limits from the GSEs and the way they lend on that, but do you find that to be the case within your portfolio? Or should you, over time, be able to eventually get that occupancy up to a more normalized level through the rental unit program as long as the demand remains?

Right. The rental demand in the older communities that we're adding value to every day by making capital improvements and adding rental units, we will continue to increase occupancy there. And those communities, we have people reporting 100% occupancy now. So those communities' occupancy will continue to grow through rental units and they can potentially achieve 100% occupancy.

There are other communities that were designed and built for multi-section houses that are meant as high-end expansions where we're not adding rental units to those communities. Because we believe at some point sales will improve, and those are made for profitable sales. And so those communities will never have rental units, but the other communities we'll continue to add as many as the market will bear.

Got it. And going to the sales environment, it looks like your sales on a volume basis were pretty much flat year over year, but the revenue was down about 10%. Was that just a reduction in price to get that volume or is there some mix, maybe smaller homes that were sold on average? Can you give me some color on that?

First, January and February last year were pretty much a disaster in sales because of the implementation of new regulations and trying a different finance program. So we got off to a terrible start on sales last year. We don't see that happening this year. We have a more favorable lending relationship to finance the home sales. So, at this moment, it appears sales will increase.

Last year, I imagine it was predominantly sale of lower-priced rental units and the sale of repossessed homes, things like that, as opposed to sale of new homes. The sale of new homes should be between $70,000 and over $100,000. So, as we're able to sell new homes again, we see the sales volume potentially getting to $10 million or above.

Okay. And one more, and then I'll jump back in the queue. Sam, I know we've discussed some legislation that FHFA is reviewing and looking to potentially comment on, on maybe getting Fannie and Freddie a little bit more involved in lending to the manufactured housing space. Can you give us some color on any movement you're seeing there, or do you see anything -- do you see any acceleration on that end from a legislation perspective?

What everybody tells us is, it's unlikely anything will be completed until after the election. But both the Democrats and the Republicans agree there needs to be a change, and that there's something wrong with the finance laws because working people cannot get financing to buy affordable houses. So, everybody is aware of the problem. Everybody is proposing different solutions. Everybody thinks something will happen, but the question is when it will happen, and the consensus is it will happen after the election.

I just want to add, so there's no confusion. On the financing of manufactured home communities, we're very happy with the situation. And the Freddie Mac and the other government-sponsored entities are doing a really good job on the ability for UMH and others in the industry to finance the communities. What Sam and I are talking about is there should be a program that the tenants could finance their homes. At the present time, we charge, what, about 8%?

Yes.

And the conventional home mortgages are 3.75%. That's a big competitive disadvantage. And we are pushing that the government-sponsored entities, who have a duty to serve our industry, come up with a program that there be government-guaranteed loans so that we can get a lower rate of interest. By the way, UMH is perfectly willing to guarantee our portion of the chattel paper. We have every confidence in whatever loan we sell that the mortgage we put on that home is a good mortgage. We think, with a government guarantee added to the package, we can get lower interest rates for the consumer.

Great. Thanks, guys.

Very good. Thank you.

(Operator Instructions)

And we have a question from Rick Murray of Midwest Advisors.

Good morning. Can you provide us with how much of the depreciation expense in the quarter was related to the rental homes?

I don't have the number in front of me, but I'll take a look and get back to you on that.

Okay, great. Thanks. And just one more, if you had available, the amount of maintenance capital expenditures in the quarter?

Capital expenditures, you're talking about repairs and maintenance?

Capital expenditures.

That's in our cash flow statements. So let me pull that up right now. If you look at in the cash flow statements, we have a purchase of investment property and equipment of $51 million, but included in that are the rental homes of approximately, I would say -- 8 times 4 -- about $32 million.

Okay, great. Thank you.

You're welcome.

The next question will come from John Shaia, private investor.

Yes, I may have missed it, but I didn't hear any discussion on the dividend going forward. Can you please elaborate a little, please?

Several years we've announced that the funds from operations have not covered the dividend. And we've been very optimistic, though, that we're going to increase occupancy. The main thing at UMH is to increase occupancy. We have, what is it, 18,000 --?

18,900.

18,900 units. We have 2,700 vacancies. Historically, if you go back more than a decade, manufactured home communities were full. And we're very optimistic we can increase our occupancy. And that increase the top line and that will increase the bottom line, and we'll have the dividend covered. But at the present time, there is a shortfall.

Now, this year, as Sam pointed out, is beginning rather optimistically. We think sales are going to pick up, we think occupancy is going to pick up. We think the rental unit program is going to work even better this year, and we may have an increase in FFO this year. But because there is a deficit, we still continue with $0.18 a quarter, $0.72 a year dividend. And we're optimistic we will be able to cover that dividend. But it may take more than this year.

Just to correct the number you gave, it's 17,793 sites.

How many vacancies do we have?

3,000 approximately.

3,000 vacancies is $15 million in potential revenue. And when you analyze UMH, that's where we're concentrating all our efforts to go back to a community program where we run 100% occupied.

Thank you.

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

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

The conference is now concluded. Thank you for attending today's presentation. The teleconference replay will be available in approximately one hour. To access this replay, please dial US toll-free 1-877-344-7529, or international, 1-412-317-0088. The conference ID number is 10077524. Thank you, and please disconnect your lines at this time.