UMH Properties Inc (UMH) 2017 Q4 法說會逐字稿

Good morning, and welcome to UMH Properties Fourth Quarter and Year-end 2017 Earnings 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-K that we filed with the SEC yesterday, we have filed an unaudited annual and fourth quarter supplemental information presentation. The supplemental information presentation, along with our 10-K, are available in 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 annual 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; Anna Chew, Vice President and Chief Financial Officer; and Brett Taft, Vice President.

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 fourth quarter and year ended December 31, 2017. This year, we achieved many milestones, including: increasing the size of our manufactured home portfolio to 112 communities containing 20,000 developed homesites, inclusion in the MSCI REIT index, reaching an all-time high stock price of $17.90 and solidify our capital structure.

UMH has been able to successfully expand our business by acquiring communities that were adversely impacted by economic, demographic and regulatory factors. We believe all of those factors are now improving and are resulting in increased manufactured home sales and occupancy in all of our communities. The improvements we have made to these communities, combined with the increased demand, have resulted in increased occupancy and income, significantly adding value to our portfolio.

In 2017, we strengthened our balance sheet by reducing our perpetual preferred cost and positioned the company for future growth. This was accomplished by redeeming our 8.25% Series A Preferred Stock and issuing a new 6.75% Series C Preferred Stock. This 150 basis point reduction will result in $1.4 million in annual preferred dividend savings going forward. The new issue had strong demand allowing us to not only redeem the $92 million of existing 8.25% Series A Preferred, but we also raised an additional $47 million to fund our future acquisitions, our rental home program, capital improvements and expansions.

Our 2017 earnings were impacted due to the expenses associated with completing this transaction and the temporary dilution associated with carrying the additional preferred until it became fully deployed at the end of December. Normalized FFO for the year was $21.7 million or $0.66 per diluted share compared to $18.4 million or $0.66 for the prior year period. For the fourth quarter, normalized FFO was $6.3 million or $0.18 per diluted share compared to $5.3 million or $0.18 in the prior year period. Our normalized FFO for the quarter fully covered our $0.18 dividend, even though the funds from the preferred offerings were not fully deployed until the end of December.

While the acquisition market remains highly competitive, we were able to selectively purchase properties that met our investment criteria. We completed the acquisition of 11 communities containing 2,000 developed homesites for a total purchase price of $63.3 million representing a cost per site of approximately $32,000. These communities are located within our existing footprint, and each provide additional growth opportunities through the filling of vacant sites and from expansion capacity.

Looking to 2018, cap rates remain at historic lows and pricing has been aggressive for our property type. Having said that, we anticipate that we will acquire $50 million to $75 million in communities in 2018.

Our operating platform continues to produce excellent results. I am happy to report that rental and related income increased 12% in 2017 resulting in our seventh consecutive year of double-digit income growth. This growth can be attributed to the successful execution of our rental and acquisition programs. Our same property operating numbers also continue to reflect strong performance. Same property NOI for 2017 was $54 million as compared to $50.2 million for 2016, representing an increase of 7.6%. Our same property expense ratio continues to improve and was 43.7% in 2017 as compared to 44.5% in 2016. Same property occupancy increased to 82.7% at year-end 2017 from 81.2% at year-end 2016, representing a gain of 150 basis points. Our same property rental home occupancy increased to 93.5% at year-end 2017, up from 92.1% at year-end 2016.

Our average monthly rent per site increased 310 basis points to $436 per site. As our communities continue to grow occupancy levels, increase rental rates and complete deferred maintenance and capital improvement projects, we expect our expense ratio to further decrease, which will drive continued strong same property results.

During 2017, our rental home portfolio grew by 950 homes. Our rental home program continues to deliver outstanding results and is the primary driver of our revenue and occupancy growth. At year-end, our rental home portfolio consisted of approximately 5,600 homes, representing 28% of our total homesites. The demand for our rental homes continues to be strong, demonstrated by our rental home occupancy of 93%. This demand is driven by the need for affordable workforce housing in our geographic areas. We anticipate installing an additional 800 rental homes in 2018.

Sales of manufactured homes continue to trend upward. Sales for 2017 were $10.8 million as compared with $8.5 million in 2016, representing an increase of 27%. Sales have now increased by over 20% for 3 consecutive years. We expect that this progression will continue in 2018.

Our sales volume is improving, but it is still below our potential volume in a healthy housing market. Conventional home prices in our markets continue to rise. Given this trend, the quality and affordability of our product becomes more apparent and we should see increased sales demand. In an effort to drive sales, and as a result of our lower cost of capital, we lowered our chattel interest rate for customers to 6.75% for new home buyers. There's reason to believe that additional lenders will enter the MH market as Fannie Mae and Freddie Mac begin to purchase chattel loans. There is also proposed legislation in congress that will ease some of the restrictions in the Dodd Frank Act and should improve access to financing. We remain confident that our sales operation will return to being a major driver of earnings in the future.

Our total portfolio now comprises 5,900 acres, 54% of which is in the energy-rich Marcellus and Utica Shale regions. No other REIT of any property type has as much acreage in these energy-rich regions. Oil prices have stabilized above $60 per barrel, which has increased investments in the shale regions. As pipelines continue to be completed, additional wells are drilled and as infrastructure is upgraded, our communities will benefit greatly.

Our properties in the shale region not only benefit from increased occupancy and revenue growth, but also from leasing our mineral rights to drilling companies. In 2017, we leased the mineral rights on one 78-acre parcel for a bonus payment of $251,000. We will earn 18% annual royalties once the property starts producing gas. We have received other inquiries, which demonstrates the increased economic activity in our region.

Included in our 5,900 acres are 1,500 vacant acres upon which we can develop additional sites. In 2017, we developed 98 expansion sites at 4 separate locations. We are working to sell and rent the homes in these communities and begin the next phases. In 2018, we plan to build 365 sites at 7 separate locations. We are currently working to permit an additional 1,400 sites for future construction. That includes over 600 sites being permitted in our strong Tennessee markets. UMH recognizes that vacant sites have significant value when the economy surrounding those vacancies improves.

Our overall occupancy remains relatively low because our business plan is to acquire communities with significant vacancies in rental markets with growth potential. New manufactured home communities are very difficult to get approved. Therefore, these vacant sites have tremendous value. Our 3,800 vacant sites provide us with opportunity to continue to rapidly improve our results for the next several years. Once occupied, these sites will generate an additional $20 million rental income and net approximately $11 million. We have positioned the company for significant internal growth for years to come.

UMH's business operations are as strong as ever. Our properties are performing exceptionally well. Private real estate is trading at historically high prices, yet public companies are trading substantially below net asset value. As this trend reverses, UMH should see another year of share price appreciation.

I would like to take this opportunity to thank our dedicated UMH team for all their efforts and hard work. We are proud of the results achieved by our team and remain optimistic about the prospects for our company and our industry.

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 $6.6 million or $0.19 per diluted share for the fourth quarter of 2017, compared to $5.7 million or $0.20 per diluted share for the prior year period. Normalized FFO, which excludes realized gains on the sale of securities and other nonrecurring items, was $6.3 million or $0.18 per diluted share for the fourth quarter of 2017, compared to $5.3 million or $0.18 per diluted share for the prior year period.

For the full year 2017, core FFO was $23.5 million or $0.71 per diluted share compared to $20.7 million or $0.74 per diluted share for 2016. Normalized FFO was $21.7 million or $0.66 per diluted share for 2017 compared to $18.4 million or $0.66 per diluted share for 2016. As Sam mentioned, our 2017 earnings were impacted by the expenses associated with the redemption of our Series A Preferred Stock and the temporary dilution from the additional proceeds from the Series C Preferred Stock until it was fully deployed. Our recent acquisition of 5 communities for $22.8 million in December should provide accretive earnings going forward.

Rental and related income for the quarter was $26.1 million compared to $23.4 million a year ago, representing an increase of 12%, primarily due to community acquisitions, the addition of rental homes and the growth in occupancy.

Community NOI increased by 12% for the quarter from $12.7 million in 2016 to $13.9 million in 2017. This is the seventh consecutive year that we have achieved double-digit year-over-year NOI growth.

Our REIT securities portfolio continued to deliver strong results, increasing from $109 million at year-end 2016 to $133 million at year-end 2017, representing 13% of our gross asset value at year-end and with an unrealized gain of $11.5 million. Our securities portfolio generated $8.1 million in dividend income and $1.7 million in net realized gains during the year.

As we turn to our capital structure, at year-end, we had approximately $390 million in debt, of which $305 million was community-level mortgage debt and $85 million were loans payable. 80% of our total debt is fixed rate. We have been reducing our cost of funds. During the year, we financed and refinanced 4 communities for a total of $44 million, which decreased our overall weighted average interest rate on our mortgage debt from 4.3% to 4.2%, while maintaining our weighted average maturity at 6.9 years.

We have also enhanced our financial flexibility by renewing and expanding our unsecured revolving credit facility. The expanded facility provides for an increase in our borrowing capacity from $35 million to $50 million, with a $75 million accordion feature, bringing the total potential availability up to $125 million. At year-end, we have $35 million drawn down on our facilities.

UMH had a busy year in the capital markets. In addition to the $60.4 million raised through our Dividend Reinvestment and Stock Purchase Plan, we issued 1.4 million shares of our common stock in conjunction with our inclusion in the MSCI REIT index, raising net proceeds of $22.5 million.

We also issued 5,750,000 shares of a new 6.75% Series C Cumulative Redeemable Preferred Stock for net proceeds of $139 million and redeemed all of the $92 million of our 8.25% Series A Preferred Stock outstanding. As Sam mentioned, this 150 basis point reduction will result in $1.4 million in annual preferred dividend savings going forward.

At year-end, UMH had a total of $239 million in perpetual preferred equity. Our preferred stock, combined with an equity market capitalization of $529 million and our $390 million in debt results in a total market capitalization of approximately $1.2 billion at year-end, representing a year-over-year increase of 18%.

Subsequent to year-end, we further increased our liquidity by issuing 2 million shares of a new 6.375% Series D Cumulative Redeemable Preferred Stock for net proceeds of approximately $48 million. We intend to use the net proceeds for general corporate purposes, which may include the purchase of manufactured homes for sale or lease to customers, expansion of our existing communities, potential acquisitions of additional properties, and possible repayment of indebtedness on a short-term basis.

From a credit standpoint, our net debt to total market capitalization was 32%. Our net debt less securities to total market capitalization was 20%. Our net debt to adjusted EBITDA was 6.5x. Our net debt less securities to adjusted EBITDA was 4.1x. Our interest coverage was 3.4x, and our fixed charge coverage was 1.7x.

From a liquidity standpoint, we ended the year with $23 million in cash and cash equivalents; $133 million in our securities portfolio encumbered by $37 million in margin loans, which has subsequently been reduced substantially; and $15 million available on our recently expanded credit facility. We had drawn down $20 million in December for our recent acquisition, which was repaid in January with our preferred D offering. We also had $26 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. With our strong financial position, we are well positioned to continue our growth initiatives.

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 pleased with the substantial progress UMH has made over our 50-year history. We have grown UMH to 112 communities containing over 20,000 sites. Our total revenue in 2017 was $113 million and continues to increase. Our overall operations continue to improve, driving the company to greater profitability. Our balance sheet is strong and will allow us to make sound investments, further increasing earnings and generating income for shareholders. All these positive operating metrics should result in an increase share price and enhanced returns for our long-term shareholders.

From a short-term perspective, this has unfortunately not been the case with our REIT and the REIT industry in general due to fears of rising interest rates. After hitting an all-time high stock price of $17.90 in 2017, our share price has since retreated. Our REIT securities portfolio has also seen a decline in value since year-end. However, when interest rates are rising because of a strong economy, REITs historically has still done well. Management remains optimistic. Public companies are currently trading at significant discounts to the value of our properties. Private real estate valuations remain at all-time highs, and cap rates have continued to compress. Therefore, we anticipate that REIT share prices will appreciate to better reflect the underlying real estate value.

The housing market is strong. Affordable housing is in short supply. Our basic business of owning and operating manufactured home communities is well conceived. The vacant sites we've acquired over the past 2 years will be a conduit to future earnings growth as we fill these sites with rental and sales homes. Our operating platform will become more efficient as we continue to acquire and fill additional sites.

We will now be happy to take questions.

(Operator Instructions) The first question today comes from Jim Lykins with D. A. Davidson.

And first, a question about acquisitions. You mentioned $50 million to $75 million in 2018. Can you give us a sense of timing? How should we be thinking about baking these acquisitions in our model this year?

Yes, this is Brett Taft here, Vice President. So timing of the acquisitions, we expect $20.5 million to close in the second quarter, the remaining $55 million to close throughout the second half of the year and possibly into 2019.

Okay. And you also mentioned cap rates being at historic lows. Can you just maybe be a little more granular? Give us a sense for what you're seeing out there right now with cap rates?

Yes, we've seen cap rates in our markets, which over the last few years, we've been able to acquire properties in the 7.5% to 8.5% range, dip down to the low 6s and even into the mid-5s for quality properties. I'm sure if you look at some of the other operators in Florida, California, some belt states, you'll see cap rates even lower than that.

Okay. That's very helpful. And one last one for me. You also mentioned you expect the expense ratio to further decline. Any more color you can give us on how you see that trending in 2018?

Yes. First, I'll point out that the acquisitions done over the last 12 months, 5 of those communities have increased revenue greater than 30%. Hillcrest Crossing in the Pittsburgh area had revenue increase 51% or $125,000 annually. Parke Place had revenue growth, 44% or $579,000 annually. So the new communities, we're going to add revenue and bring the expense ratio down. We have 39 communities that are still below 80% occupancy, and they don't -- communities don't become efficient until they have greater than 80% occupancy. So as we achieve those results, the expense ratio will further drop.

The next question comes from Rob Stevenson with Janney.

Just to follow up on the acquisition question. I think last quarter, when you guys talked about the Pennsylvania transaction and everything, that there was a second tranche of, like, $57 million of properties that you thought might close in February or March. Is that now the stuff that's been sort of pushed out to second quarter? Or did that fall through for various reasons? Can you talk a little bit about what happened to that? And what's -- what of that is still in the numbers or what dropped out?

Yes, so the $57 million that we mentioned on the last call, that's -- deal is still alive. It's just been pushed back because of loan assumptions and other due diligence things. So that's what we think will close in the second half of the year, possibly 1 tranche of that in 2019. The $20.5 million is a new deal that we had under contract towards the end of last year that we expect to close in the second quarter.

And I just wanted -- sorry, I just wanted to add that the original $20 million that we expected to close in the first quarter of 2018 actually closed in December, at the late December of 2017.

Okay, all right. Great. And then, Sam, does the company have a share repurchase program in place currently?

Yes, it's approved by the Board of Directors. We've never used it, but it exists.

Again, we're reserving our capital for expanding the company. We believe these acquisitions, we're buying parks and communities substantially below the cost of building new communities. And we believe we can take an older community and revitalize it and modernize it and have an excellent earning asset. And we do think our pipeline will be -- what are we projecting, $50 million, $75 million?

$75 million.

$75 million for this year, and so the first thing on our agenda is to have the capital to keep our acquisition program going. In addition, we do the rental program, which is 800 units a year, about $32 million. And so our capital needs are in the range of $100 million a year.

Okay. Well, I guess the question then would wind up being understanding that you're going to use free cash flow and all the other sort of things for expansion. But with the stock off more than 33% from your high, why not sell some of the securities -- some of the stock in the securities portfolio and buy back your own stock? Certainly, you believe your own stock's more undervalued than GOV or SIR or whatever else is in the securities portfolio at the moment. And that balance doesn't really fluctuate. You guys typically don't draw that down to invest in rental units and things of that nature. So just a question as to whether or not the board's thought about using some of that capital to buy back stock.

In the past, we've reduced the securities portfolio to buy parks, and we will reduce the securities portfolio if we need the money to make acquisitions. We're not enamored of short-term buybacks. We've done our own study of it. I'll take a moment to explain our study. The communities that we own go ahead $5 million, $6 million, $7 million a year. The value of our company goes up for a very substantial amount each year. The shareholder value goes up a very substantial amount each year. And the amount we gain by increasing our book value by buying back stock or even by not issuing additional stock to buy parks is a very few cents per share. And it's more important to our policy to get where we're going and to be sure we get where we're going then try to be too tight with capital. We see a lot of other REITs who have terrific future but are having trouble right now. We don't like to depend. We have excellent bank lines, but we don't like to depend on our bank lines. Bank lines go ahead 4, 5 years, and 4, 5 years is nothing. So we want a strong capital base to continue to make our acquisitions and to get the benefit of the long-term prospects of the company. And we will, of course, consider buybacks depending on where the market goes. We certainly, as a policy, would love to issue preferred stock and buy back common stock. And we were surprised that the preferred market has, for some reason, closed down recently. But we expect that market to come back because no one else is issuing preferred, at least, not in any quantities. I believe the numbers are -- have been $3 billion in preferred redemptions and only $1 billion in stock issued. So we think we will be able to issue preferred sometime in 2018, but it certainly can't be done today.

The next question comes from Herb Steiner, a private investor.

Sam, I understand your business plan, and I do support it. But in the long term, what it means is that you keep introducing parks that are sick parks, and you restore them to health. But your overall occupancy rate remains stuck, and your bottom line remains stuck. So if you keep doing this, spending $60 million, $70 million a year on parks with 60%, 70% occupancy rate, it doesn't seem clear that over the long -- the short run, the company is going to go anywhere. You're going to increase the occupancy rate, and you're going to increase your bottom line.

So I think what's happening -- so we're on the REIT index, and as the REIT index, those stocks fall, we're falling them. And people are losing sight of the fact that UMH is a hybrid. We have a taxable REIT subsidiary, UMH Sales and Finance, and our sales end -- it's been impossible to sell homes for 10 years, and that's dramatically improving at this moment. So nobody is looking at UMH's potential when you're looking at the stock price. The communities we acquired over the last 5 to 7 years, we're buying them $30,000 a site and under. When we increase the occupancy to 80% and replace these with brand-new homes, the value comes up to $60,000 per site or greater. We can then refinance, take out the money and do whatever you want with it, including buying back stock. The markets -- the stock market's view at this moment is so short term, and I don't think it'll stay that way. I mean, we've had 7 years in a row of 10%-plus growth in operating income. We've increased the sales over 20% 3 years in a row. So we can't look too closely at the stock pricing. And you're assuming that the acquisitions are causing the low stock price, and I really don't think that's the case. I think what's causing the low stock price is strictly being on the index, and all of the REIT stocks are falling. We fall with it. We're a smaller company, so we fall greater.

Let me add one thing. The present value we're creating can be monetized by mortgaging our parks. And the mortgage situation currently is excellent, and we think it will get even better. And the ability to take $1 billion worth of parks and borrow $700 million on it is something that we see in the future. And we've seen how other REITs in our industry do a substantial borrowing and paying extraordinary dividend. So we're not concerned of -- as long as we build value, we have no concerns whatsoever how we're going to get it to our shareholders. We will...

Sorry, it would just seem that if you paused on buying parks and simply developed your 3,800 vacant sites that, that would increase your bottom line dramatically.

Absolutely, but then one is not -- one has nothing to do with the other. We are going to -- the housing market is excellent. The figures today were sensational with 300,000 new jobs. You get 2 million, 3 million new jobs. You get 1,500,000 family formations. You get rising income. You get other groups that need housing badly. There's going to be -- there is a housing shortage, and we think that the Marcellus and Utica Shale will cause Pennsylvania and Ohio to lead the nation. And so a mere 2,000, 2,500 vacant sites are going to feel like nothing, and we will have a -- it's not -- I don't want to say we have no problem, though. Everybody here works very, very hard, and we have managers and regional managers. We have salespeople. We have sales lots. We work very hard to fill the sites. And we think sales, by the way, in the manufactured housing industry are going to surprise everyone in 2019. And so we think we're going to be able to fill the park. And I can tell from your question you understand the situation. If we fill the parks at the rents we get, we'll have excellent numbers. And that has nothing to do with our other policy that we can add, and we have added 2,000 sites a year; 10 years, 20,000 sites. And someone will look back at those sites being acquired at $40,000, $50,000 a site when they're worth very much more. And so we'll make money both ways, and we see no reason to stop doing a moneymaking business plan because we have the vacancies. We'll handle both at the same time. Well, thank you for your question. I think you understand the value of those empty sites, and we do, too.

Yes, Mr. Landy, I do, but the marketplace doesn't seem to. As we speak, your stock is at a 52-week low, and the message just isn't getting out.

Well, you keep asking good questions, and we'll give good answers. And maybe the message will get out.

The next question comes from Craig Kucera with B. Riley FBR.

I want to talk about your same store. You go back a year ago, 2 years ago, even through second quarter this year, you were looking at low to mid-double-digit same store. Seems like a lot of the reduction in same store's coming on the expense side. Can you provide some commentary on that? Is that all just increases in real estate taxes or something else going on?

Craig, it's Anna. Yes, there were -- there was a lot of increases in real estate taxes, and that was also due to adding the rental homes. But also, don't forget that included in these new same store is acquisitions that were done in 2015. And that was about 2,800 sites, and the occupancy level at that time was about 64%. So what happens is it's more difficult to bring that 64% up in 1 year to the 80% level, which would be optimum in order to operate the communities efficiently.

I see. So in theory, if you guys stopped acquiring new communities that were going into the same-store pool, you would start to see an acceleration back to those levels. Is that fair to assume?

We hope so because if we -- except that the only problem with stopping is that once we fill these communities, what are we going to do? We need to make sure that we grow. We need to make sure that we are looking at the future and seeing what occurs in the future.

The revenue increases and the operating income increase we're receiving on the communities is meeting our expectations. And the biggest factor in valuating UMH or UMH stock is what is somebody think of the regions that we're in. And everything going on economically really favors the exact regions where UMH is located, so that we're very excited about our potential to increase home sales, fill rentals even faster. And even to the extent, new communities have a higher expense ratio because of the vacancies and us turning them around. We're so big now, 20,000 sites, that 2,000 sites that are only 60% occupied are not going to have such a negative effect on our current income or funds from operation. To me it's well worth doing, and I think -- I've said it before, but I'm going to repeat it, UMH stock is a REIT on the REIT index, and I think that is 100% the cause of our decline in stock price. And if somebody looks at our growth history in any way, shape or form, the value of our communities, we should not possibly be at the stock price we're at today.

Well, let me add to that. REIT shares are selling at substantial discounts from their asset value. At the same time, the people that keep track of real estate values are reporting that real estate values are continuing to rise. So we have an unusual situation. If you look at a graph about the values of properties, property values are going up. And if you look at the values of REITs, at the present time, they're going down. And most REITs are reporting that they're selling at 15% to 20% discounts from book value. And this is an unusual aberration. I haven't seen this before, and I expect that it will not continue. We think that the private real estate market will remain strong and that the REIT share prices will again reflect the underlying values of the properties that we hold.

Got it. I feel like last quarter, you were discussing maybe raising rents on the entire portfolio closer to 4%. Is that something that is still under consideration or maybe you're testing out a few markets?

Yes, and it seems very doable. I'd point out that the 2015 acquisitions, which were substantial based on our size at the time, 2,774 lots, this is the third year of their turnaround. And we always point out it takes us 3 full years to turn these properties around. And we believe that they, in fact, will turn around this year. And yes, the 4% rent increase -- we don't increase rents at communities with less than 80% occupancy. If it's close, we'll increase it to 4%. But if it's substantially less than 80%, we won't increase the rent. But other than that, they're all going to receive the 4% rent increase on both the lot and the homes.

And we're doing $110 million. We're projecting $4.4 million in rent increases throughout the company plus the rent increases we get from filling sites.

Yes. And 800 rental units, which adds $6.4 million plus in new revenue.

Okay. You mentioned you're going to be developing a number of new sites this year. Can you comment on what the cost, as you think about that, is whether that's on a per-site basis or in the aggregate? And what you think your overall CapEx budget might be for this year at your communities?

So first, we already own the land where we're building sites, and we see expenses coming in at $60,000 per lot. And so that's what it costs to build a lot when you already own the land.

So we add 10,000 to 20,000 to land value, Sam, you get $70,000 to $90,000, the cost of building new sites.

Yes.

We're very proud of this Memphis Blues park. I'm not sure that -- I know that at the present occupancy, we're not making a lot of money. But we wanted to demonstrate to the housing industry that we can build housing units and say $70,000 for the site and $40,000, $50,000 for the home. Even take it up to $150,000, we can build 3 bedrooms, 2 baths for $150,000. And when we talked to Fannie Mae or Freddie Mac or the people at HUD, we defy them that anybody in the whole country to produce affordable housing for a price of $150,000. In San Francisco they're trying to produce affordable housing, it's costing them $350,000 a unit. But that's exceptionally high. But you can't -- we want manufactured housing to be a leader in providing affordable housing. And we do, do projects, demonstration projects to demonstrate to the government that we have this capability. And long term, we hope to be a supplier for affordable housing to the nation.

Okay. One more for me. I'd like just to talk about G&A. I think G&A was up maybe about 20% year-over-year. Are you planning on adding any more headcount in 2018? And how should we think about G&A for the next year?

I think we're okay in G&A next year. I think headcount is where we expect it to be now. Part of the G&A for this year was because of the increase in stock price and, therefore, it increased compensation cost when we issued our restricted stock and our stock options. So -- but I believe headcount will be approximately the same as this year.

The next question comes from Rick Murray with Sorin Capital.

Could you please clarify the comments surrounding preferred issuance? I guess I'm a little a bit confused since you've had some REIT preferred issued this week in fact. So is it that your bankers have told you that you can't issue or just the yields that they're quoting have risen so much that it's unattractive?

So first UMH did not issue any preferred stock this week. UMH hasn't issued preferred stock since...

January.

Since January.

No, I said one of your REIT peers.

Okay.

I didn't hear that.

Well, but all REITs are different. I think that the last REIT shares we issued are trading at $24.25.

Right around (inaudible)

And that's not a significant difference from $25, but it does create problems for us trying to issue more preferred. If the preferred would get up to $24.50, and if our brokers would tell us that we could issue more, we would probably issue more. We're a great believer in preferred stock. It gives the investor a pretty high return. It's perpetual, but he's not locked in if there's a good market. So it's financial engineering that works. And from the company's point of view, we go out and buy parks and do long-term investments because we have perpetual capital. And if it proves to be in our interest 5 years from now, when the preferred is callable, we can call the preferred. What we don't like to do is convert preferred capital to bank lines that only lasts 3, 4 years. So if we can issue preferred at a lower cost, it may make sense to do long-term notes. But in any event, we really believe in preferred, and we have a strong capital structure because it's comprised of equity, common equity, preferred stock and our bank lines.

Okay, great. And can you just touch briefly on what drove the -- what looks to be a pretty dramatic reduction in the gross margin on home sales this quarter?

I don't think there is a gross -- reduction in the gross margin on home sales. My -- we're going to look at it closely while we're talking, but I believe that we are always achieving the same margins, that sales are up. That currently that -- okay, we have $10.8 million in sales. In 2005, we've sold 259 homes. In 2006, we sold well over 200. We're 4x that size today, and we're only selling 74 new homes. And what's our number for total home sales? But in any rate, there shouldn't be any changes in the margins. They're...

In the fourth quarter, your cost of sales was 78% versus a year ago, it was 67%. So that would imply that you had about an 1,100 basis point reduction in your margin.

We don't have enough sales to even make that significant. I think you have to step back and look at what we're trying to do. The industry used to sell 250,000 homes a year. The industry used to sell 15% of the homes in the whole country. So that if there was 2 million homes sold, we sold 300,000. And I won't get into all the reasons why manufactured housing homes dropped down to 50,000 and then it's up to 80,000. I think right ow, it's running at 100,000. But I saw some industry experts think we're going to go back to 150,000, 200,000 homes, and we think there's a need for it. And under the right circumstances, UMH could have as a major interest retail sales lots, filling parks, and sales could be very important to the company. Right now, for years we've lost a lot of money on sales because management here has stuck to its guns thinking that eventually, sales are going to be an important part of UMH's future. We've actually gone out and bought sales lots. These are lots that a decade ago, did $20 million and made $2 million a year. And we picked them up for $0.25 million, which I thought was nothing, but it's costing us a lot of money to carry these. And we have a big sales effort here, and we are looking to the future. We think the future is manufactured housing, and we think manufactured housing is affordable. And we expect sales to be significant. But the volume of our sales now, I couldn't tell you our margin because I know we lose money every year on sales. We have to get the sales up. Sam, where do we have sales up to?

Well, just to be specific for you. In 2017, we sold 222 homes, new and used; in 2016, 170 homes; in 2015, 135 homes. When we were 1/4 our size in 2005, we sold 259 homes; in 2006, we sold 285; in 2007, 243 homes. So we got to get -- to make money on sales, we have to be about $15 million. The reason you're seeing that change, it has nothing to do with new home sales. When we acquire communities, a value's placed on homes that come with the acquisition. When we sell those houses, there may be minimal markup on those homes, and that's what's knocking down the average. But it has nothing to do with new home sales.

The next question comes from Brian Rohman with Boston Partners.

Do you have an ATM in place right now?

We don't have an ATM on the stock. We were preparing to do an ATM on the preferred. But you can only do an ATM on preferred for some strange reasons, which I don't fully understand. Unless you sell them...

At around par.

Around par. And so we're trying to -- we have, what, A, B, C and D Preferred out?

Well, B, C, D is out right now.

B, C, D out. And when we get the preferred in the right position, and when the market for preferred is a little stronger, and I saw from one of the questions that -- one of the questioners may disagree with me and think that the market is ready. Market changes weekly, so it could change. And I expect the market to change because of what I said, that there's $3 billion in redemptions and only $1 billion in issuance, and there is a need for preferred.

Hold on. I'm talking about common shares because when I pull up UMH's stock symbol, that's not preferred holders. That's common stockholders.

Okay. No, we do not...

So let me ask you, so you do not have an ATM outstanding at this point?

No, we do not.

And what is your thoughts on issuing new common shares at this point?

We've been issuing over the years through the dividend reinvestment plan and the shareholder investment plan. And that has been a substantial source of capital, and we recently cut that back, and we're measuring that off against our pipeline of deals. And every month, we make a decision as to the size of it. But I think for this month, we cut it in half, and we may cut it in half again next month.

So Sam, you were talking about operating income growth over an extended period of time. Could you just repeat your comment from earlier?

Well, our projection of the communities we own is revenue should go forward $10 million a year. At least $5 million of that will be new operating income, and that's without factoring in if we get sales growth and sales profit. So I think that, that realistically occurred in 2017. I think there's no reason to believe it won't occur in 2018. And I think we can even do better than that.

Okay. So -- and that's operating income, and that is after or before preferred dividends.

It's strictly operating income. It's before interest expense. It's before administrative expenses, before anything else.

Got it. Okay. And the comment on buybacks, Gene, is that you think its short term. And I mean, I'm sitting here looking at your data on Bloomberg. And since 2012, the share count has doubled from 17 million to 35 million. And I think going back to the gentleman who asked the question earlier about allowing existing communities to mature, I think I'm going to phrase the issue differently and say that, because your share count keeps going up, you are permanently diluting existing stockholders along the way. And reducing the share count, particularly buying stock back below NAV, would have the opposite effect of starting to increase FFO and related income streams per share. So I'm not -- and that would be permanent. It wouldn't be onetime. So I'm trying to understand your thought process.

The thought process is, we've taken the stock from -- over the years that I've been with the company, we went from $1 to $10 and then our high was $17. And the size of the company has gotten from 7,000 sites recently to 20,000 sites. And the value per share is up substantially. So that we've been increasing the value of the stock pretty significantly over the years, and we'll continue to do it.

Okay, hold on. I just want to -- I don't mean to be rude. I want to challenge you there for a second. Because I'm sitting here looking at your stock chart, and unless I'm missing something, your stock is the same price it was in 1998, which is 20 years ago. So I'm not sure what time frame you're looking at, but this stock is basically going nowhere. And...

Now you could say it goes nowhere. We have nothing but happy shareholders. The recent decline is unusual. And if you'd be a little patient, I remember having this type of conversation with people who were telling me, you're not covering your dividend, and I'd have these arguments, and they get you nowhere. If you think we're the same company we were in 1995, that's your opinion but...

No, no, that's not my opinion. That's the stock market's opinion. And 20-plus years is a long period of time. Look, I'm going to say the same thing. I've said it to Sam. I think the -- and somebody addressed this peripherally earlier. I think the investment portfolio is a waste of corporate resources and a distraction from a wonderful operating business that has lots of reinvestment potential. Selling that portfolio, using it to either reinvest in properties or buy back the stock from just about anybody's standpoint is probably the right thing to do. It is a waste of time and resources.

Well, we don't think so, and you haven't sat through the negotiations we've sat through in terms of buying $75 million, $100 million portfolios, bidding on $188 million portfolios. The presence of the liquidity and financial strength we have has allowed us to sit at the same table with the biggest companies in the industry, and we're 1/10 their size. So it has accomplished certain things. On the other hand, it may be time to -- if and when the securities market recovers, we may be able to issue enough preferred stock that we don't need the securities portfolio. But it's been an excellent -- historically it's done a lot of good. But there's no sense going on over it. We'll go to the next question.

Next question is from Michael Boulegeris with Boulegeris Investments.

Congratulations, Sam, Gene and Anna, Brett on the hard-fought normalized FFO matching your dividend. Certainly, after the manufacturing industry downturn I think this is a great achievement. And let me just state quickly, we have total confidence in your stewardship. So my first question is, coupled with your home sales rising, rising home sales, certainly if you make progress on filling the vacant sites, maybe, Gene, as Chairman, you could take this on. Does that bode well for your long-term dividend sustainability and potential growth?

I have to tell you that the optimism I have is unbounded. Some of it, I don't claim any benefit for. The policies the government's pursuing, the Federal Reserve is pursuing, the economy that -- the term that Sam uses, it's smoking. The numbers today are fantastic. The Wall Street Journal has an article about the trillions of dollars that individuals have. Home prices have been going up 6% a year for the last 3 years. People are rebuilding their wealth. And when they rebuild their wealth, they have money to buy their kids a home, if not a full home, they buy a manufactured home. The economy is terrific. The need for housing is there, and we are really optimistic. And the last question there, we haven't come in anywhere since 1995. In 1995, we were a $100 million REIT, and we're sitting here trying to buy $100 million in properties. We try to buy $600 million properties. If we bought back stock and didn't have a strong capital, we couldn't do what we're trying to do. And I wish people would listen to us. We think that the manufactured housing sales are going to come back. One of the problems in the industry is all the dealers have been wiped out. And by the way, Warren Buffett, who's certainly one of the leaders, he believes that the industry is going to be a major industry, and that he's buying and building a -- in Clayton Homes, he's building a juggernaut that if and when we start selling not $5 billion worth of homes, but $10 billion and $15 billion, he's going to be a major player to the industry. And far be it for me to say that we will compete with them, but we will take this company to be a player. And we are going to take this company, that we're going to build parks. We're going to do subdivisions with manufactured housing. We're going to have sales lots that will do $20 million. The future of UMH is unbounded. I just wish I was a little younger because it takes -- nothing happens in 1, 2, 3 years. We bought into the Marcellus and Utica Shale 5, 6, 7 years ago, and it's still in its infancy. It's going to be -- except that you must understand the United States is now the #2 energy producer in the world, and they're producing it somewhere. And I'm telling you, it's not just Texas. It's Pennsylvania, and it's Ohio, it's going to be in all the areas we're in. And the country's future is terrific. The industry we selected is terrific. And I think we're going to do very, very well, not long-term future. We think 2018 will be great. 2019 will be great, 2020. We just have to -- the problem with the country is to get the housing built that we need. So we're going to do very, very well.

And Sam, with the low leverage, relative low leverage, let's say historically for UMH, would you agree that the company is poised for steady and high-quality growth going forward?

We do a 5-year projection. In 5 years, we project FFO being over $1 per share and quite a bit over $1 per share. And what you do is just take the $10 million per year. 5 years, it's $50 million new dollars from the existing communities; $25 million in new operating income from the new -- from the existing communities, and then you have the new communities and then you have the sales. Everything we did and -- with the wind right in our face, I mean, the weak economy for the blue-collar worker, the weak housing demand, all those things were negatives, and yet we still did extremely well because of the rental homes and our flexibility. We blanket the state of Pennsylvania. We blanket Ohio. Our ability to become a major retailer of houses is there. We have the right people. We're in the right locations. So again, we can dramatically increase home sales. The communities will fill their vacant sites. We're going to do our expansions. We're going to sell and rent homes there. So the existing revenue is very stable. The potential for the revenue growth is strong, and we believe we're in better shape than ever.

Well, certainly we, too, believe in the total return equation as opposed to the partial return equation that sometimes is transient, given that the high replacement cost and barriers to entry. Anna, could you -- do you feel that the expense ratio can come under 45 or work its way to maybe 42, 43 this year?

I don't think it will happen in 1 year. I think it will go down. By how much depends on how quickly we can fill out communities and how quickly we can put these rental homes in. We expect that we will put approximately 800 rentals into the our communities in 2018. It will drop slowly. Our expense ratio will drop slowly.

Okay. And just maybe 2 last ones, if I can squeeze in. Do you see -- I mean, after the hurricanes in Florida and Texas, we saw some increase in prices for manufactured housing. Is that stabilizing? And maybe, Brett or Sam, you could share with us the impact of the Shell cracker facility in some of your communities. I think you're really in the heart of that region.

Well, first, there are increase in the home prices. And I think that's good for the 5,300 rental units we already own. Replacement cost goes up, but the increase in price is 4% to 5%. There are longer delays getting houses. But predominantly, those are in the markets of Florida, California, places that were impacted by the weather. We see longer backlog, but our longer backlog is 3 to 4 weeks as opposed to the many months that it is in Florida and other states like that. The second part of your question was?

Yes, I mean, I guess, I'll just talk about our communities in Pennsylvania, Ohio, Indiana, predominantly where most of our 3,800 vacant sites are. And demand remains extremely strong in these markets. We'll easily be able to fill the 800 new rentals and should see a substantial increase in overall occupancy as well. So although we are acquiring vacant sites, we do so because we believe we can fill them very quickly and further increase value to our portfolio so...

And I mentioned earlier, but Parke Place, a 1-year-old acquisition, revenues up 44% or $579,000. That's one community we purchased, and that's the best of them. But 4 other communities have revenue increases over $100,000. So we do have the ability to increase revenue in the acquired vacancies.

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. 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...

(technical difficulty)

This conference has now concluded. Thank you for attending today's presentation. The teleconferencing replay will be available in approximately 1 hour. To access this replay, please dial U.S. toll free, 1 (877) 344-7529 or international, 1 (412) 317-0088. The conference ID number is 10116327. Thank you, and please disconnect your line.