Q3 2019 Earnings Call
Saturday morning, and welcome to you MH properties third quarter 2019 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please said no conference specialist by pressing the Starkey satellite by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on attached.
So with John Your question. Please press Star then too. Please note. This event is being recorded.
It is now my pleasure to introduce your host Ms. Nelli Madden director Investor Relations. Thank you, yes, ma'am you may begin.
Thank you very much up right there.
Like missions to this document that you filed with the FTC yesterday, we have filed and then we get this third quarter supplemental information presentation.
The supplemental information presentation, along with our 10-Q are available in the company's website at U.M. age that's right.
I would like to remind everyone that certain statements made during this conference calls we try not to historical facts, maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements. That's me Mike on this call are based on our current expectations and then the ball various risks and uncertainties.
Although the company believes expectations reflected in any forward looking statements are based on the reasonable assumption.
The company can provide no assurance since expectations are they will be achieved.
Right. So certainly give that could cause actual results to differ materially from expectations.
Sales in the Companys third quarter 2019 are you really since filings with the Securities and Exchange Commission.
The company disclaims any obligation to update its forward looking statements.
In addition, during todays call, we will be discussed to non-GAAP financial metrics.
Conciliation over these non-GAAP financial metrics.
Did the comparable gift financial metric.
As explanatory unforeseen language.
Well that's in our earnings release.
Supplemental information in our historical STC filings.
Having said that I would like to introduce management with us today.
In late <unk> Chairman.
Samuel Landy, President and Chief Executive Officer.
And I choose Vice President and Chief Financial Officer.
And bad debt Vice President.
It's now my pleasure to turn the call over to you and me just president and Chief Executive Officer Samuel Landy.
Thank you very much Nellie we're pleased to report a result for the third quarter ended September Thirtyth 2019.
You want me try to busy quarter on the acquisition front.
During the quarter, we closed on the acquisition of four communities containing 1500 home site for approximately $56 million.
These acquisitions, bringing our total portfolio to 122 communities containing approximately 23000 developed home sites.
These communities were acquired at a weighted average occupancy rate of 63%.
Well if these communities are in Pennsylvania, one in Ohio, and one in Michigan.
These communities are in markets, where we are experiencing strong demand.
As we have proven in the past our business plan of upgrading the communities, we acquire will overtime, resulting strong occupancy and NOI growth driving significant value creation.
The acquisition market remains challenging both one off acquisitions and portfolio sales continue to trade at historically low cap rates.
We are looking at several opportunities and hope to grow our acquisition pipeline soon.
We are working to identify deals in our target markets that are immediately accretive to earnings.
Our acquisition program has been very successful generating strong returns at value added communities takes time.
The longer we own these communities and integrate them into our platform the better they will perform.
When visiting our communities it is clear to see how well we have executed our business plan.
We have acquired many value add communities that required significant capital improvements and had a lot of deferred maintenance work has been completed and we are rapidly filling sites to our rental and sales programs.
The appreciation of our properties is a fundamental component of our long term business plan.
Many of our encumbered properties exhibit strong appreciation that will be realized when mortgages come due and they are refinance.
As a case in point during the quarter, we refinanced a community that we acquired in 2012 for $4.4 million with alone for $2.8 million at an interest rate of 5.75%.
This community appraised for $8.1 billion, we refinanced for $6.1 million at an interest rate of 3.37%.
This represents an 86% increase in value over the seven year period that we have owned the property.
This refinancing demonstrates the appreciation created by our business plan.
Our same property results continue to validate our business plan during the quarter same property revenue was up 7.8% over the prior year period and expenses were up 10.1%, resulting in same property NOI growth of 6%.
Well, we are happy with these results as we continued to execute our business plan. We expect these numbers to improve further.
Same property occupancy was up 357 sites over the prior year period, increasing occupancy a 170 basis points to 84%.
From 82.3% in the prior year period.
We added 688 rentals to our same property portfolio, an increase of 11.3% over the prior year period.
Same property pool contains several recent acquisitions that are now starting to generate strong income gains and are beginning to see a reduction in overall expenses.
Although sales for the quarter were down 7% over the prior year period, we're pleased with our year to date sales growth of 25% over the prior year period.
This quarter, we sold 71 homes as compared to 80 homes in the prior year period.
Our average sales price during the quarter was approximately $62000 as compared to $59000 in the prior year period.
This represents an increase of approximately 4.6%.
Our gross profit percentage for the quarter was 25% versus 26% in the prior year period.
Gross profit percentage year to date was 27% first 24% in the prior year period.
Year to date, we have sold 230 homes as compared to 204 homes in the prior year period.
Our average sales price year to date was approximately $60000 first $54000 in the prior year period, representing an increase of 10.8%.
Our sales operation continues to meet our expectations sales demand is strong throughout the portfolio.
We expect our sales operation to generate meaningful returns in the future.
We continue to make progress with our expansions. This year, we expect to deliver 170 newly developed home sites at three locations.
2020, we expect to obtain approvals for 680 home sites at 16 locations.
These newly developed sites will allow us to continue our sales on rental growth at communities that have consistently produced excellent results.
Subsequent to quarter end, we implemented in aftermarket or ATM sales program, allowing us to tap into the preferred market on an as needed basis.
This ATM program further enhances our balance sheet and improves our financial flexibility.
This program is intended to largely replace our common stock issuances to the dividend reinvestment in stock purchase plan.
And now and I will provide you with greater detail on the results for the quarter.
Thank you Sam funds from operations for F. FFO was $5.8 million or 40 cents, but then did share for the third quarter of 2019 compared to $7.1 million or 19 cents per diluted share for the prior year period.
Normalized AFFO, which excludes realized gains and losses on the sale securities and other nonrecurring items was $6 million or 15 cents per diluted share for the third quarter of 2019 compared to $7.1 million or 19 cents per diluted share for the.
Our year period.
This decrease in Pershare F., though is primarily attributable to the impact of how raising capital and a reduction in dividend income from our securities portfolio.
Well actually normalized FFO increased 7% as compared to the second quarter.
Rental and related income for the quarter was $32.9 million compared to $28.7 million a year ago, representing an increase of 15%.
This increase was primarily due to community acquisition. The addition of rental homes and the growth in occupancy.
You need and Hawaii increased by 11% for the quarter about $15.4 million in 2018.
$18.2 million in 2019.
Our normalized operating expense ratio increased to 47.5 to set from 46.3%.
We expect the expense ratio to decline as new revenue originated during the first three quarters offset the increase expenses.
As we turn to our capital structure at the end of the quarter, we had approximately $452 million in debt of which $376 million with community level mortgage debt and $76 million where loan payable.
85% about total debt it's fixed rate.
Weighted average interest rate on our mortgage debt with 4.1% at the end of the third quarter 2019, compared to 4.2% in the prior year and 4.3% at yearend 2018.
The weighted average maturity on our mortgage debt was 6.2 years at quarter end compared to 6.3 years a year ago.
During the quarter, we completed the financing refinancing a four of our communities for total proceeds.
Proximately $44.9 billion.
These Fannie Mae mortgages are at a weighted average fixed rate of 3.4%.
[laughter] 10 year maturity and principal repayments.
Based on 30 year amortization schedule.
Proceeds were primarily use to you pay the existing mortgages, which had a total balance of approximately $13.8 million with a weighted average interest rate of 5.91%.
As a quarter as your major had a total of $389 million in perpetual preferred equity.
I preferred stock combined with an equity market capitalization of $575 million and out $452 million is debt results in a total market capitalization of approximately $1.4 billion.
As Sam mentioned subsequent to quarter end, we implemented an ATM program to date, we have sold approximately 350000 shares about 6.375% series D preferred stock.
Net proceeds of approximately $8.7 million after offering expenses.
From a credit standpoint, our net debt to total market capitalization was 31% our net debt securities to total market capitalization was 23%.
Our net debt to adjusted EBITDA was 6.7 times.
Our net debt securities to adjusted EBITDA was 4.9 times, our interest coverage was 3.4 times and our fixed charge coverage was 1.5 times.
From a liquidity standpoint, we ended the quarter with $11.1 million in cash and cash equivalents.
And $18.3 million available on our revolving lines of credit for the financing of home sales as a purchase of inventory and $70 million available on our unsecured credit facility with an additional $50 million potentially available pursuant to an accordion feature.
We also had $116 million in a week securities portfolio encumbered by $41 million in margin levels.
Subsequent to quarter end, we reduced the balance of our margin loans by approximately $10 million.
The performance of our securities portfolio has improved substantially during the quarter and subsequent to quarter Ed.
At quarter end of the portfolio represented approximately 9.4% of our Undepreciated assets.
Yeah, I mean that portfolio to no more than 15% of out of depreciated assets.
Without strong financial position, we are poised to continue outgrowth initiatives.
And now let me turn it over to GE before we open it up for questions.
We are happy with the progress that we have made with respect to our business plan.
Fundamentals up our business remain encouraging.
So, there's a continuing national and need for quality affordable housing.
We are well positioned to fill this need.
As federal state and local legislators continue to support our industry. This may lead to growth opportunities through the development of new communities in the future.
The recent changes in credit markets up increase the value of all reads the combination of lower rates and longer terms make that an attractive substitute for both the preferred equity and mortgage debt balance sheets.
The existence of 13 trillion dollars invested in negative great investments.
At a downward pressure on oil property cap rates, so that sub 5% valuations have become commonplace.
Applying these cap rates to you or maxes financials made Lee the analysts to determine that you amazes significantly undervalued by the public market.
Year to date same property NOI is up $2.3 million.
On an annualized basis $3.1 million.
As I already stated high quality manufactured housing communities and portfolios. So currently trading at sub 5% cap rates.
Applying a conservative 5% cap rate to a increase in I know why dupixent increasing value of $62 million.
Dollar 55 per share.
As we can we captured this increase in value for the refinancing of our communities.
Common shareholders will benefit.
Next year, we can improve our already strong balance sheet by redeeming approximately $95 million.
For 8% series B perpetual preferred.
This will enable us to reduce the cost about preferred dividends substantially.
We estimate potentially realizing annual savings of approximately $3 million or eight cents per share.
We're very proud of that business, where you ended the portfolio that we have built we will now be happy to take your questions.
Well now begin the question and answer question to ask the question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys <unk>.
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The first question today comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Sam So you sold 71 homes in the third quarter this year versus 80, and a year ago quarter, However, sales going versus your expectations and how is the availability of financing today for residents.
<unk> sales are according to expectations basically you know because our sales increase so much the first and second quarters. We ran the inventory down. So it was a little bit hard to catch up which is why sales or didn't grow this past quarter, but sales are on target we hear a.
About more and more a large price home sales and a you know we think they'll continue to meet our expectations. We sold so many homes that we wound up with a little bit of a lag in this time it took to set up the replacement homes.
Okay, and how is financing for in that space. These days I mean.
How is that how you know given the average short of FICO cost and the lack of land I mean, how easy is it today versus a year ago or three years ago for someone to get financing for one of these.
Palms, not only just in your communities, but just in general.
No. It it it's improving I mean compared to two three years ago its.
Improved dramatically, though the higher incomes.
The wage earners.
Received.
The more they qualify for financing more people 55, an older or selling their homes and realize.
You know positive cash after the sale so they have higher down payments or could pay cash to buy a home from us. So all that's improving.
You know part of the reason our business plan works, so well is.
Our still so many people that could not get financed under the existing laws that we rent.
Eight homes for every one we sell but the sales or improving.
The increased incomes changes in the finance laws and the additional money people have from you know the appreciation that conventional homes all improve homesales.
I have to add to that the Samuel Landy, if I didn't know what for the manufacturing how's against this year that we're very proud of.
He had the Chairman's award for his work isn't helping the industry.
Demonstrate that there was a need for manufactured housing and there's a need for manufactured housing finance.
Exhibited on the Washington Mall.
We ended this was wonderful the people that attended we're very important people.
We anticipate that there will be accident in Congress and with the president and even if it is a pilot program. We think there's going to be a financing available for the public. So they can buy manufactured homes, not paying seven seven and 8% mortgages, but more competitive rates.
The three and a half 4% rates you get a conventional home and we know that just yesterday the congressional hearings on the subject and as I said I'm very proud of what salmon team has done the team set up a model home.
With short notice and I Wonder if we set up home and there's a video on our website you can see Oh, we told us, though I do a very hopeful that we will get the government to help us provide affordable financing to meet the affordable housing shortage.
Okay.
Then.
A question on the rental business, if I look I mean sequentially last quarter. Your rentals were 93, six occupancy and this quarter 92 for is that just you know a timing situation, where you know you've had units that are set up but the person hasn't moved in yet.
Or did you get you know Pete move outs in certain communities et cetera, you just talk about what the trend is there and what was going on there during the quarter Yep, Yeah, Brett I'm going to have you answer specifically, but I just want to point out one thing.
We found that are normal average move outs per month is 170 homes. So approximately 170 homes turnover each month, which means that 30% of our rental homes turnover per year and you know we maintain our high occupancy and Brett will go into detail on that now.
Just just a little bit more detail, there, but you're looking at or overall rental occupancy which would include a homes that were acquired with our recent acquisitions and they do not have a strong occupancy as our same store pool. If you look at our same store pool occupancy remains strong at 93.6% as compared to 93.4% a year ago. So.
That's just a function of acquiring vacant homes that we either need to remove remodel and occupied so that should sort itself out shortly.
Okay and have you guys you know sort of pushed leasing I mean, most of your I mean, all of your assets are essentially in cold weather States I mean, the apartment industries pushed the vast majority of their explorations into you know sort of second and third quarter on a calendar.
Basis, I mean are you got Howard's you're sort of trend in terms of lease explorations in the rental business do you still you basically you know, 25% a quarter or you guys pushed your rentals into the warmer weather months as well.
No I mean, we view, we strictly people move in they get a one year lease the lease expires it gets renewed.
And they get their annual rent increase the timing is based on when the people move in and we maintain our almost 95.
Per cent occupancy and we continue to add or 800 rental homes per year, we fill up.
Okay, and then and what were the major drivers of the nearly 10% year to date increase in same store expense growth, what's the the big chunky stuff in there.
Well part of it was the increase employee costs.
Because of the new acquisitions don't forget in 2000, and the same store pool. This year included the 2017 acquisitions, which is about 2000 sites and that was only about 65% occupied so it takes a little more of expenses in order to bring those are the occupancy.
Up for that so we have a little bit of the increase in salaries, a little bit of rental home expense, because we are putting a new rentals in there and it also included in the rental home expense was the real estate real estate taxes for the rental homes.
Okay, and then last one for me I mean other than the.
Monmouth dividend reinvestment did you guys make any additions to the securities portfolio this quarter no.
Okay. Thanks, guys.
Again, if you have a question. Please press Star then one next question comes from Q, Sarah with B. Riley FBR. Please go ahead.
Hi, Good morning, guys appreciate the color on the home sales Sam.
But given the accelerated demand do you think rightsize inventory today to meet demand as we sit here in the fourth quarter.
Oh, we're.
Doing everything we can to bring our inventories to the highest levels. We've ever had because we always know that whoever has the homes ready in the winter and early spring, we'll get the sales. So we are actively pushing all of our communities.
To add vacant rental homes vacant homes for sale and I believe everybody's doing that will go into the winter season, with the highest inventories of vacant rentals and vacant homes for sale, we ever had because we're very optimistic of our ability to fill those profitably.
Okay great.
I want to switch to the rental home.
Segment, I think you're almost at 800 units for the year, which is typically your annual target can you tell us or expectations for fourth quarter and was that more of a seasonal that are picking up north of 400, and the third quarter or do you anticipate running it maybe a higher level on a go forward basis any color would be appreciated that will give you some specific information yet so.
That that the number I think it's what 760 something right and that includes units that were acquired at our recent acquisitions I believe there was about 100 in 100 860 808, I believe exactly so we do believe we remain on track and looking at our VP of rentals report the other day to day.
As of today not be ended the quarter, we've ordered 730 homes and we do believe that will meet that target of 800 new homes.
At our communities.
Got it so that that makes sense.
I guess just given the amount I guess can you talk about traffic in uptake for the rental units. Both those you acquired recently as well as what you deployed.
So we are 100% convinced that the solution to vacant manufactured home sites is the rental business. There was a time decades ago when people could sell for homes per month.
Very few manufactured home communities expansions itself for homes per month, but we can rent for homes per month in many communities. So the customer acceptances fantastic. It it's a great great products to three bedroom two Bath house on a set on a 50 by 100 lot and.
The demand for and creates waiting lists and a lot of communities, we maintain that 94% rental occupancy and we you know were.
More optimistic about it than ever.
We think we still have to obtain more acceptance of it from the finance companies because we think we should pay a lower rate of interest on the house, but that's the last hurdle to jump it has investor acceptance that as customer acceptance, we just want lower rates of interest for the rental units.
Got it and given your commentary on rental person sales I think you quoted sort of an eight to one ratio as you know you expand 170 home sites. This year I think a pretty decent amount next year is that sort of the expectation is that you'll probably see a mix somewhere along those lines as you as you expand those communities.
For the company that will be the total mix, but unexpectedly we generally build in areas, where we anticipate home sales and we anticipate profit. So Memphis Blues is the exception because that's the all rental community and 50 of the loss or 100% for rental houses, but as a general matter. We build lots in places we think we can.
Earn so sales profits.
Okay got it one more for me just want to circle back to your comment on the preferred ATM I think you've been raising somewhere on a run rate of 30 million plus or minus.
From the drip program are you basically, saying that you're you're effectively going to shut that off and really kind of fill that part of the capital stack with with preferred going forward versus coming I think it's important to note. We did shut it off there's there's still the.
Dividend reinvestment plan and the 1000 dollar.
Exome wave guess, but beyond that there was no additional shares of common stock through the shareholder investment plan, we shut it off in.
Effective for the September dividend reinvestment and channel to purchase plan.
So I guess, what what is what will be common equity then issue would be out of that program going forward. I had mentioned you mentioned it was there was still going to be a portion of it.
The dividend reinvestment or.
40 million shares we paid 28 million in dividends and we encourage shareholders to reinvest dividends I believe it's between 10 and 15 million I believe.
Invested and we always continue that program, we have shareholders the decades.
We invested in compound the compounded the investments in a very pleased with that program. So we will continue the dividend reinvestment program, but the optional cash pile up at the shareholder investment plan used to basically 4 million them up $36 million to $40 million a year and the that capital was.
The bank acquisitions and to.
Oh, I O rental homes and keep a very sound the balance sheet.
And of points out and Oh, we bikes.
We have very low leverage the we have the ability to buy a substantial amount. So I'm not communities and we don't think it's necessary to continue the so oh equity. So we want to keep as close to the 40 million shares outstanding.
Two in capital base will continue to grow.
The Oh preferred stock, which we think is a great deal both for the investor and for the company.
Okay. Thank you.
Again, if you have a question. Please press Star then one.
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That's fair appears to be no further questions. 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 has always gene Anna and I are available for any follow up questions. We hope to see you at the married conference. Later this month and we look forward to reporting back to you in March with our year end results. Thank you.
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