UMH Properties Inc (UMH) 2017 Q1 法說會逐字稿

Good morning, and welcome to UMH Properties First Quarter 2017 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. 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 first quarter supplemental information presentation. This supplemental information presentation, along with our 10-Q, are available on the company's website at umh.reit.

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 2017 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements.

In addition, during today's call, we will be discussing non-GAAP financial metrics. Reconciliations of these non-GAAP financial metrics to the comparable GAAP financial metrics, as well as explanatory and cautioning language are included in our earnings release, our supplemental information and our historical SEC filings.

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, Vice President and Chief Financial Officer.

It is now my pleasure to turn the call over to your 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 first quarter ended March 31, 2017.

Core FFO for the quarter was $0.17 per diluted share in both 2017 and 2016. Normalized FFO for the first quarter of 2017 was also $0.17 per diluted share, representing an increase of 6.3% year-over-year. Community NOI increased 16% year-over-year. Same property NOI increased 12.6% year-over-year, driven by a same property occupancy gain of 180 basis points.

UMH had a busy quarter on the acquisition front. During the quarter, we completed the acquisition of 5 communities containing approximately 1,300 developed homesites situated on 382 acres, for an aggregate purchase price of approximately $36.5 million. The weighted average occupancy of these communities was 63%.

We have a proven history of improving communities that we acquire by making the necessary investments to bring them up to our high standards. UMH further recognizes that vacant sites have significant value when the economy surrounding those vacancies improves.

Our portfolio is now comprised of 106 communities with 19,300 developed home sites, located throughout 7 states. We are very proud of our high-quality portfolio and we were recently honored with the Manufactured Housing Institute's Land-Lease Community of the Year Award for the Northeast/Mid-Atlantic region. This award was for Port Royal Village, a 465-space all-age community, situated on approximately 101 acres. This award showcases our dedication to providing quality affordable housing at all of our locations.

We will continue to focus on acquiring communities with significant upside potential and leverage our expertise to build long-term value for shareholders. This task is becoming increasingly difficult, given the attractiveness of the asset class. Manufactured housing delivers the high-quality income streams that many funds and investors are seeking, and therefore, demand for our property type is very strong. That being said, we expect to be able to acquire select communities on a one-off basis to continue our growth strategy. The increased demand for our property type has resulted in continued cap rate compression. This validates the substantial value that UMH has created by acquiring 66 communities containing approximately 10,400 homesites over the past 6 years.

UMH also anticipates a number of expansions to our existing communities. In particular, we are proud to announce the opening of our first all rental community, Memphis Blues in Memphis, Tennessee. This community will be built in phases and will ultimately contain over 300 home sites.

We continue to execute on our long-term business plan and are very happy with the consistent improvement in our operating metrics. UMH is on track to gross over $100 million in rental and related income this year. We've added significant value to our existing portfolio by upgrading our communities, thereby increasing occupancy and revenue.

Our metrics across the board continue to improve. During the first quarter, community net operating income increased by 16.2%, and our operating expense ratio has continued to improve year-over-year from 48.5% to 46.8% representing a 170 basis point improvement. As occupancy continues to increase, this ratio should improve further.

Our same property results have also strengthened, substantially increasing the value of our communities. Same property occupancy increased from 80.1% to 81.9% year-over-year, representing a gain of 180 basis points. Year-over-year, same property revenue increased 7.5% while expenses only increased 1.6%, resulting in an increase in same property NOI of 12.6%.

Our strong same property operating results continue to validate our business plan of acquiring communities in strong geographic locations below replacement cost, making necessary improvements and growing occupancy and revenue by utilizing our rental home and sales programs.

Our rental home program continues to be the primary driver of our occupancy and revenue growth. The demand for our rental homes is strong in predominantly all of the markets that we operate in. Our product is extremely high in quality and our communities provide amenities and services that other forms of housing cannot at this price point.

During the first quarter, we installed and rented approximately 240 homes, including those purchased with our community acquisitions. At quarter end, our rental home portfolio consisted of approximately 4,900 homes, representing 26% of our total homesites. Occupancy of our rental homes continues to be strong, and was 93.7% at quarter end. We plan to install and rent approximately 800 new homes per year as demand dictates.

Our sales of manufactured homes have not yet returned to pre-recession levels. Although this quarter, we increased home sales by approximately 12% from $1.7 million in gross sales in 2016 to $1.9 million in 2017, this volume is still not enough for our sales operation to be profitable. We are encouraged to see that overall industry shipments in February 2017 increased 19% to a seasonally adjusted annual rate of almost 99,000 homes.

Housing demand and alternative housing costs favor our industry. Conventional home prices are at pre-recession levels and continue to increase. The S&P Case-Shiller U.S. National Home Price Index recorded a 5.8% annual gain in February. Sales of existing homes in March hit the highest level in a decade. The supply of homes on the market is low. The unemployment rate is at a 10-year low, as hiring increases and wages rise. Lower unemployment, wage growth and general consumer confidence should drive household formation, which increases the need for affordable workforce housing. We are optimistic that we will achieve continued growth in 2017.

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 $5.1 million or $0.17 per diluted share for the first quarter of 2017, compared to $4.6 million or $0.17 per diluted share for the prior-year period.

Normalized FFO, which excludes realized gains on the sale of securities and other nonrecurring items, was $5 million or $0.17 per diluted share for the first quarter of 2017, compared to $4.4 million or $0.16 per diluted share for the prior-year period, representing an increase of 6.3% on a per-share basis.

Rental and related income for the quarter was $24.5 million compared to $21.8 million a year ago, representing an increase of 13%, primarily due to community acquisitions, the addition of rental homes and the growth in occupancy.

Community NOI increased by 16% for the quarter, from $11.2 million in 2016 to $13 million in 2017. This is the 11th consecutive quarter that we have delivered double-digit, year-over-year NOI growth.

Community operating expenses for the quarter were 46.8% of rental and related income, representing a 170 basis point improvement over the 48.5% expense ratio for the prior year period.

As we noted in the past, most of the community expenses consist of fixed costs, and therefore, as occupancy rates continue to increase, and as we upgrade and integrate our acquisitions, these expense ratios will continue to improve.

As we turn to our capital structure, at quarter end, we had approximately $387 million in debt, of which $305 million was community level fixed-rate mortgage debt at a weighted average interest rate of 4.4%, and $82 million were loans payable at a weighted average interest rate of 3.1%.

80% of our total debt is fixed-rate. The weighted average interest rate on our total debt is 4.1% compared to 4.3% in the prior year period.

During the quarter, we renewed and expanded our unsecured revolving credit facility. This increased the borrowing capacity from $35 million to $50 million, with a $75 million accordion feature, bringing the total potential availability up to $125 million. We have reached a milestone this quarter, increasing our total enterprise value to over $1 billion, representing a 36% increase year-over-year.

In addition to our $387 million in debt, at quarter end, we had a total of $187 million in perpetual preferred equity and an equity market capitalization of $467 million.

From a credit standpoint, our net debt to total market capitalization was 36%, our net debt less securities to total market capitalization was 26%, our fixed charge coverage was 1.6 times, our net debt to EBITDA was 7.3 times and our net debt less securities to EBITDA was 5.2 times.

From a liquidity standpoint, we ended the quarter with $8 million in cash and cash equivalents; $108 million in our securities portfolio, encumbered by $29 million in margin loans; and $15 million available on our credit facility. We also had $28 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory.

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

Thank you. Anna.

UMH is celebrating its 50th year of operations. As Founder and Chairman of the Board of Directors, I'm pleased with the substantial progress UMH has made in its long-term strategic business plan.

As Sam mentioned, over the past 6 years, we have more than doubled the size of our portfolio by acquiring 66 communities containing approximately 10,400 homesites. We have increased occupancy and revenue at these communities, thereby generating significant increased value to our shareholders.

UMH's first quarter results were an excellent start to 2017. We have delivered solid performance metrics, with double-digit growth in rental revenue, home sales, total NOI and same property NOI. The performance of our securities portfolio has been excellent. We are very pleased with our current holdings, which had a $14.7 million in net unrealized gains at quarter end.

The future prospects for UMH Properties are excellent. We continue to focus on our business plan and have positioned ourselves for strong growth in 2017 and beyond.

We will now be happy to take questions.

(Operator Instructions) Our first question comes from Craig Kucera of Wunderlich.

With the acquisitions you completed this quarter, they were all in kind of mid-to-late January. What was the impact to operating expense this quarter, if any? And how should we think about what the budget is to maybe clean those up in this year and next year, if you can provide that?

I think, in the beginning, we had additional -- some additional expenses. But I believe that before the end of the year, we will bring it back down to our normal operating expense ratio of about 46%, 47%.

Got it. So we should see a bump, I guess, in the next quarter or so bringing down and then coming back, okay. This was a big quarter for acquisitions for you, and I appreciate the commentary on the market, and maybe doing more one-offs, but how should we think about the rest of the year? Do we think that first quarter was probably the bulk of acquisition volume for this year?

Yes, this is Brett Taft here, our Vice President of Acquisitions. We have only one property in our pipeline right now for about $4 million. We are working on a couple of other one-off deals. Nothing I'd like to comment on too much further right now. But I would expect some continued growth throughout the year.

Got it. With the administration change and turnover in Congress, are you hearing or seeing any movements in regard to loosening of lending as regards to manufactured home sales?

We just returned from the MHI Conference in Las Vegas, and it was very, very upbeat. We're making substantial progress on all of the legislative fronts. We're making very good progress with FHA, with Freddie Mac. We're very optimistic. It's going to take a little more time, but we think with our ability to get the government-sponsored entities to provide mortgages on our parks, and hopefully, channel mortgages on homes for both us and our tenants. So we think the legislative front -- we're going to make substantial progress. And we really should. I mean, the regulatory environment used to be very restrictive, and we're hopeful that we can expand our lending and expand our ability to finance new communities.

Okay. One more for me and I'll jump back in the queue. With the expansion of the line, are you likely to utilize that more heavily and keep a higher balance line on that? Or are you more inclined to continue to predominantly finance yourself with mortgages?

Well, we do a little bit of both. Because right now, the interest rates are really -- the protracted low interest rates are great for us and our mortgages. And we can get 10-year financing at a fixed rate of around -- I'll say between 4.25% to 4.5%. So we'll do a little bit of both. Some of the communities that we purchase do not qualify for Freddie Mac or Fannie Mae financing. Because again, we're buying 63% or 60% occupied communities. Those we can put in the line and utilize the line.

The next question comes from Brian Hollenden of Sidoti.

Can you talk a little bit about -- I noticed year-over-year the proceeds from the DRIP program, kind of was about $13.5 million higher. Just maybe talk about, a little bit, why the big change?

Well, I really like the DRIP and SIP. And we've been really pushing very hard to get on the MSCI Index and the RMZ Index, which rebalances, I think Monday. So we'll find out Monday if all of our efforts are successful. The higher capitalization you have, the more likely you're going to get on the index. And we've increased the outstanding shares to 31 million shares. And at the current market price, we're very close to $500 million market capitalization. And this isn't the sole reason, but one of the reasons we've been interested in raising our capitalization rather than borrowing money or issuing more preferred, is because of the way the index works. And we are one of the few REITs that aren't -- that is not on the index, and we're going to find out if we go on the index. It will be a milestone for the company. But we have no control over that. That's done by the people who run the index.

Appreciate that color. Turning now maybe to the sale of manufactured homes. Seasonally, the first quarter and the fourth quarter are weaker due to weather, but what are you kind of seeing as we move into the spring and what's going on, on that front? Can you talk a little bit about the sales effort and maybe what we should expect over the next 6 months?

Well, I believe we're seeing improvement in sales. We have the Sales Centers at Port Royal Village, Heather Highlands, Sunnyside, and when there are no sales, it's very hard to properly staff those or get them going. But as sales improve, success generates success. So things are getting better. And I think we can do far better, and I think 2017 may be a turning point on sales. But it's still just a start of what we can really do.

In a way, we're our own competition. The rental program is so successful, it's so well received. For $750 to $850 a month we provide a 3-bedroom home with 2 baths, which is very competitive in the area, and it's really a good deal for the consumer. And at those costs, we compete with ourselves on selling homes, particularly unless we can get lower-cost financing, -- it's -- competitively, people are renting, but we're very happy that rentals are doing so well. And if I make one more observation, which I make every time, the overall housing situation in the United States is that there is a shortage of housing and there is a really serious shortage of affordable housing. And we're in markets that are growing in population, growing in workforce. So our prospects not quarter-to-quarter but year-to-year, is very good in our opinion.

And sorry if I missed this earlier, but did you sort of update expectations on how many rentals you do plan on adding in 2017? Is 800 to 1,000 about the right number?

That's right, that's the right range. We acquire some rentals in acquisitions. And we -- demand certainly has allowed us last year, and most likely this year, to add 800 on our own. So somewhere between 800 and 1,000 is most likely.

Okay. And then, any -- maybe just last for me and I'll get back in the queue. Any major changes in the Marcellus region in terms of demand?

Well, yes. The minute after the election, we got calls from the drilling companies, et cetera, that they were hiring again and that they needed houses. And I'm talking about -- it was 2 days after the election. And also, we're going to close on our first gas lease in a number of years, where we sold the drilling rights for $265,000 and 19% royalties and that should close this month, I believe.

We're still as bullish as we are at every presentation on what the Marcellus and Utica shale will do for the areas in which it's located, which includes the main areas in which we have communities.

The next question comes from Paula Poskon of Stove Advisory Services.

I just want to follow up on your commentary about your all-rental community in Memphis that you're working on. Are you optimistic that in -- a full rental community will make it easier to get financing through the GSEs? And more broadly, what is your appetite for having more all-rental communities in the portfolio?

Well, we think it's a great model and we'd love to do it again and again. An apartment builder builds a 1,000 square-foot 3-bedroom, 2-bath unit, for $250,000. We could build it for about $100,000. And that makes us extremely cost competitive for the people who want housing, plus there is no common-wall neighbor, above you, below you or under you. So, as a rental product, the acceptance is incredible, which is why we're renting out 800 or 900 homes per year. We're really looking forward to completing the occupancy of Memphis Blues. There's currently homes rented there. The grand opening is actually not going to be until next month, but even before the grand opening, we've rented houses and it's going very well. And yes, we look forward to doing more. And Anna will tell you about the financing.

Well, what we've done is, we had a roundtable discussion with the GSE's, as a matter-of-fact, with Fannie Mae and then we had a meeting with Freddie Mac, and they were very receptive to this program. They don't know if they can do it yet, but they are thinking about it, when we have an all-rental community. Because as we pointed out, it's very similar to a garden apartment. They have questions regarding, of course, the maintenance of it. But I said, it's just like any other maintenance of a garden apartment. What is the difference? So they were very receptive to it. They're thinking about it. We can't do anything, of course, until it is more built-up and more occupied, but they have it in their radar screens.

And then just one last question on that. Do you think that there will be any difference in the expense ratio in managing an all-rental property versus an ownership-rental mixed community?

Interestingly, right now, new revenue is coming in at a 36% expense ratio, which is lower than the current overall UMH expense ratio. So you have to factor in these are brand-new rental units, but I don't see any reason that the expense ratio is going to exceed our norms, which are 50%, if we're paying the water and sewer and 30% if it's directly billed to the resident. So it seems like all is going very well on the expenses and managing the rental units. And at this moment, I see no reason to believe that's going to change.

Of course, in the beginning, because we are in the beginning phases of Memphis Blues, there are some, I'll call them fixed costs, which we will have to go over as we fill the community.

The next question comes from Michael Boulegeris of Boulegeris Investments.

Sam, could you give us an update as to the progress in Saratoga?

Yes. Yes, we've completed approximately 63 -- 64 lots. We're ready to go. There are homes set up. They are absolutely gorgeous. The timing is perfect, because Saratoga is a very seasonal area, and we're really looking forward to kicking this off. He already has interest in a couple homes of sales. And we're very excited about it and it's ready to go.

And might you comment on just traffic overall by region that you're seeing early this year?

Yes, we have a traffic report that tells us how we're doing on traffic, and it is higher than ever for the season. I mean the quarter 2 is usually your highest traffic of the year. But quarter 1 2017, while dramatically exceeds -- 1,400 homes was the traffic in quarter 1 2016, a little over 1,600 was the traffic first quarter 2017.

Okay. I might have missed this, but I believe same property occupancy was 84.5% at year end, 2016. Could you refresh me on what the same property occupancy was at the end of Q1?

At the end of Q1, same property occupancy -- now don't forget, it's a different same property pool, because we update it every year. Same property pool for 2017, are properties that were owned as of, let me see, January 1, 2016, and same property occupancy for the 2016 numbers were properties owned as of January 1, 2015. So you have to take that into account. But the same property occupancy, as of March 31, 2017 on this new pool is 81.9%. Compared to a year ago, this pool was 80.1%.

Very well. And Anna, with the -- I guess the number of acquisitions in Q1, was the bump in operating expenses a bit front loaded this year? Or maybe you could just -- if you could give us some guidance as to whether that's going to level out some in terms of the rate of growth?

Absolutely. We always have a little more expenses when we first acquire the community. Some clean up, et cetera. But we believe that these communities will generate approximately the same expense ratio as our other communities.

And just a little bit more color there. Two properties we purchased in Indiana were very high quality, we shouldn't expect too many increased expenses on that front. One of the properties acquired in Ohio and one of the properties in Pennsylvania will require a little bit more of an increase in initial expenses, but the way we've structured our acquisition program, we intend to take care of them within the first 6 months of ownership now. The other property in Ohio should not dramatically increase expenses.

And, Brett, tell them how about how optimistic we are on Hillcrest and what's going on there.

We purchased Hillcrest Crossing in Lower Burrell, Pennsylvania. It was a -- it is a 200-site community. It was purchased 40% occupied. The old owner just did not have the resources they needed to make it move forward. We've demoed about 30 to 40 units in the community already. It looks fantastic. We have 20 homes on order, all of which are spoken for. So we expect to infill that community very quickly and add some meaningful value.

Are you seeing -- is that petrochemical complex starting to be more impactful in terms of your Western PA occupancy?

Yes. This is the Pittsburgh area, that's where Hillcrest is and we know just what happened. Nobody in the area did well for 10 years, and they're basically giving up and we're coming in. And we see the turnaround occurring every day. And we are workforce housing, we are 100% dependent on the job market for blue-collar workers, but the job market is improving dramatically and we get to ride that wave.

And we are also putting in brand-new homes that people have not seen in the recent past.

But let me cover the Shell Cracker Plant, which I believe is between $2 billion and $4 billion and will require 10,000 people to build it over 3 years. But it's -- they have not yet started construction but that's a pretty arbitrary line because they -- preconstruction work was pretty substantial, moving 6-lane highways and putting in utilities and that sort of thing. But Shell is going ahead with this cracker plant and my understanding for the oil and gas industry is, everyone expects 2 or 3 more plants of the same size in the same areas, as they develop experience with it. So it is going to be very, very positive for the job and employment and economic growth of that area, which is going to be fantastic. I always tell you, Pittsburgh is going to be like Qatar in the Middle East, 10 years from now.

And Mike, the thing we should tell everybody. Google Panda Plants. Panda Plants take natural gas out of the ground and convert it to electricity, it's the most efficient form of electric generating ever created. They're opening these billion-dollar plants all over Pennsylvania and it's going to be fantastic for Pennsylvania and fantastic for us.

And lastly, if I could ask the Chairman, Gene, I guess in Philadelphia last fall, you spoke -- I think rather optimistically regarding the dividend. You continue to have that optimism looking ahead and maybe, also, if you could give us some perspective, looking in terms of the intrinsic value or speaking to the total return of UMH, what you see in the future as you witnessed UMH in tough times and now as things are starting to look better?

Well, it's a cycle, what we're doing is building value into the parks. And the parks are going ahead nicely. And as we increase the occupancy and increase the rents, the ability to mortgage these parks increases. We think it takes several years to get to the point we can go back to Freddie Mac, and I believe we borrow -- what is it 70%, 75%?

70% to 75%.

75% of value. And at that point, when we can take a park that we bought and have turned around and go back and get the investment we made out of it and in fact, get additional cash, there's a substantial amount of money that we can refinance. And we're talking $20 million, $30 million, $40 million in additional financing over the next 2, 3 years, based on the increased income from these parks. And as those numbers are realized, it just takes time to show Freddie Mac that we're getting these results and go in and apply for the mortgages and get them. And then our cash really changes. Right now, we put in $40 million in rental homes and we finance it largely out of our own equity and we'll get all that equity back, plus -- so I'm very optimistic that we will be able to increase the dividend substantially over the years, as we increase occupancy. We have 19,300 sites with almost 3,000 vacancies. And as we fill these vacancies, our financial strength will be substantial. So we will take a good look at the dividend as these numbers continue to improve.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Samuel Landy for any closing remarks.

Thank you, operator. I would like to thank the participants on this call for their continued support and interest in our company. As always, Gene, Anna and I are available for any follow-up questions. We hope to see you at NAREIT's REITWeek event in June, and we look forward to reporting back to you after our second quarter. Thank you.

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