Q2 2022 UMH Properties Inc Earnings Call
Our quarterly preferred dividend to normalized <unk> results in <unk> of approximately 23 per share or <unk> 92 per share on an annual basis.
We look forward to the second half of the year when the effect of the recapitalization will be appearing on our quarterly results. We are pleased that our hard work over the past few years has resulted in a well covered growing dividend post redemption, our payout ratio is approximately 87%.
We have increased our dividend two consecutive years and we remain on track for additional dividend increases in the future.
Moving onto operations, our properties continued to perform well our communities are reporting excellent demand for both sales and rentals same property rental and related income increased six 2% and expenses increased eight 3%, resulting in NOI growth of four eight.
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Our community operating results are consistent with what we experienced during the first quarter last year's backlogs are still impacting our operations as we depleted our rental and sales inventory and are in the process of installing new homes for rent and for sale, we have over 500, new homes in our communities.
Various stages of setup, we have several hundred additional homes. So it should be delivered over the next few months.
As we are able to setup and fill these units, we anticipate occupancy and revenue growth throughout the remainder of the year.
During the quarter, we added 99, new rental homes to our portfolio as compared to 134 last year.
Year to date, we have added 151 homes to our portfolio as compared to 352 last year, our rental home occupancy rates remained strong at 94, 6% the.
The rental home program has been and will continue to be a critical component of our success generally we would expect to add 800 rental homes per year year over year, we added 253 rental homes to our portfolio. The difference of 547 homes would generate an additional $1 5 million.
Of income for the quarter and drive income growth of 10% and NOI growth of 11% with the same expense increase we can achieve high single or low double digit same property NOI growth through the infill of our vacant sites. It is for this reason that our policy is to not aggressively raise rents on our exist.
Our customers. However, we re lease units, we do achieve higher rent increases for the quarter, we achieved 7% average increases on re leased units.
Sales for the quarter were down 27%. This is also related to the lack of available inventory as we are able to obtain additional inventory from our manufacturers, we anticipate our sales to grow in line with last year's results.
While gross sales volume was down our gross sales profit increased to 31% from 27% last year during the quarter, we generated sales income of $943000.
The average sales price for the quarter was $81000 as compared to $80000 last year, we financed 63% of our home sales we have a strong pipeline of pending sales and anticipate continued sales profit growth throughout the remainder of the year and into next year.
Our expansions are progressing as expected we have approximately 400 sites under construction at eight communities.
These are generally strong sales locations and should help us to drive additional sales and income growth in the future. We remain on track to deliver approximately 400 sites annually for the next several years year to date, including our $21 million acquisition in July we have closed on four communities.
Containing 718 sites for a total purchase price of $38 million.
These are value add communities that will benefit as we implement our proven business plan.
Two of the communities are located in Western Pennsylvania, One is in Michigan and the other is in Alabama, we continue to seek additional acquisition opportunities that meet our growth criteria.
Interest rates have increased but cap rates for manufactured housing communities remain aggressive and in many cases have negative in place spreads.
<unk> is proud to announce that we have invested a portion of our gain from the Monmouth real estate investment transaction into the UMH qualified opportunity zone fund or Q Osee F. Q Osee app designed to acquire value add communities in opportunity zones that are not accretive to earnings in the short term in order.
For an investment to qualify it must be located in an opportunity zone and 90% of the value of the existing buildings and improvements must be invested in the property. The goals of the Q1 F. R for UMH to earn management fees asset management fees and have the first right to purchase the communities.
Upon a sale it is similar to our joint venture with Nuveen real estate and should result in reasonable fee income and a future pipeline of accretive investment opportunities, we anticipate to Q Oc F closing on its first acquisition in the very near future. Additionally, <unk> has two development deals on.
Their contract for a total of $25 9 million.
<unk> has proposed an amendment to the tax cut and jobs Act of 2017 that could potentially increase the supply of affordable housing in opportunity zones through manufactured housing.
We have made substantial progress implementing our business plan at Sebring square the first community acquired through our joint venture we have strong traffic for sales and rentals and the prices are exceeding our expectations, we are selling new homes for over $170000 and renting homes for over $1700 per.
A month, we are encouraged by our progress and look forward to opening additional communities soon.
We have also made considerable progress building a pipeline of development deals for our joint venture with Nuveen. We currently have two communities to be developed under contracts containing 585 sites for a total purchase price of approximately $68 5 million. These communities are both located in Florida.
And we will be delivered fully constructed and ready for homes construction of one of the communities has commenced and we are anticipating a quarter one 2023 closings.
Construction of the other community is expected to begin later this year and will likely close in the second half of 2023. Additionally, we have three land deals under contract that will be delivered entitled for 423 sites in Florida, Georgia and Pennsylvania.
We will acquire these communities entitled but unimproved and manage the development process.
Aggregate purchase price for the land and entitlements is $16 5 million.
Construction at these communities is expected to be approximately $16 million the joint.
Venture structure will result in a lower basis and higher overall returns in total to joint venture has a pipeline of one eight sites for a total investment in land and improvements of $101 million. We are pleased to have been able to generate this pipeline in a relatively short period of time.
In June UMH intended and sponsored the NHI homes on the hail event, which was part of the innovative housing showcase we set up a home on the National mall to showcase the high quality affordable housing that we provide to our residents through manufactured housing. The event was well attended by the public and government officials.
I'd like to thank our wonderful staff for all of their efforts in making this event a success. We have a great team of qualified professionals that work every day to advance the interests of UMH and our industry.
The story for UMH remains the same our basic business of operating manufactured housing communities remains fundamentally sound. The recapitalization of our 675% series C preferred stock should result in a significant increase in normalized <unk>.
If market conditions allow we can also redeem our $215 million six 375% series D perpetual preferred stock.
Additionally, we have 3600 vacant sites within our existing portfolio and 1900 vacant acres that can be developed into approximately 7600, homesites that will allow us to drive organic earnings growth as demand dictates, we have external growth opportunities through the acquisition of existing.
Communities their investment in our Q Ocs and the investment in our joint venture with Nuveen.
As always UMH remains a conservative steward of capital, we look forward to generating additional value and income for our shareholders and now Anna will provide you with greater detail on our results for the quarter.
Thank you Sam normalized <unk>, which excludes nonrecurring items was $8 $7 million or <unk> 16 per diluted share for the second quarter of 2022.
<unk> to $10 3 million or 22 per diluted share for 2021.
We had previously announced on July 26, 2022, we redeemed all nine 9 million shares of our 675% series C. Perpetual preferred stock for a total of $247 million.
This redemption was completed by utilizing funds raised through our common ATM.
Israelis bond offering and mortgage debt.
Redemption is expected to increased normalized <unk> by approximately <unk> 12 per share annually.
Adding back the preferred dividend to the second quarter normalized <unk> per share would have been 23 cents for the quarter or <unk> 92 annually.
Additionally, if market conditions allow we can redeem at $215 million six 375% series C perpetual preferred stock.
It is perpetual preferred redemption is at our option.
We will analyze the market and the cost of our capital as of January 2023, redemption date approaches and determine if the redemption is in the best interest of the company and our shareholders.
Yes.
Rental and related income for the quarter was $42 2 million compared to 39.3.
$3 million, a year ago, representing an increase of 7%.
This increase was primarily due to community acquisitions. The addition of rental homes and the growth in occupancy.
Community NOI increased by 5% for the quarter from $22 $3 million in 2021 to $23 $3 million in 2022.
Sales of manufactured homes for the quarter decreased 27% from $9 6 million in 2000 $21 million to $7 million this year.
Our average sales price was $81000 with new home sales, averaging $128000 and used homes averaging $64000.
The gross profit percentage was 31% this year compared to 27% a year ago.
Sales profitability with $943000 in net profit this quarter compared to $1 2 million a year ago.
As we turn to our capital structure at quarter end, we had approximately $626 million in debt of which $469 million with community level mortgage debt.
$58 million was loans payable.
And $99 million with our newly issued 472% series a bonds.
91% of our total debt is fixed rate.
Weighted average interest rate on our mortgage debt was 377% at quarter end compared to $3 eight 1% at quarter end last year. The weighted average maturity on our mortgage debt was $4 nine years at quarter end and five five years a year ago.
At quarter end UMH had a total of $215 million in perpetual preferred equity not including the $247 million series C preferred stock, which was redeemed on July 26.
Our preferred stock combined with an equity market capitalization of $965 million and our $626 million in debt results in a total market capitalization of approximately one $8 billion at quarter end.
We had a relatively quiet quarter in the capital markets. We sold an additional 857000 shares of common stock through the ATM at a weighted average price of $23 73 per share.
<unk> generating gross proceeds of $23 million and net proceeds of $19 9 million.
After offering expenses.
In conjunction with the series C preferred stock redemption, we drew down $50 million on our credit facility, we have an additional $50 million potentially available pursuant to an accordion feature as well as $30 million available on our revolving lines of credit for the financing of home sales.
And the purchase of inventory and $15 million available on our line of credit secured by rental homes and rental home leases.
From a credit standpoint, our net debt to total market capitalization was 19, 4% our net debt securities to total market capitalization was 16, 8% our net debt to adjusted EBITDA was four times, our net debt less securities to adjusted EBITDA was $3.
Five times.
Our interest coverage was three five times and our fixed charge coverage was one six times.
Additionally, we had $47 million in our REIT securities portfolio unencumbered.
This portfolio represents approximately two 7% of our underappreciated assets, we limit our portfolio to no more than 15% of our underappreciated assets. We are committed to not increasing our investments in the REIT securities portfolio.
With our strong financial position growing earnings and access to the capital markets. 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.
UMH properties, Inc has a mission to provide the nation with quality affordable housing.
Should perform well in good times and in bad with minor fluctuations in our operating results.
It is for this reason that we are prepared for the past 54 years.
The recent redemption of our series C. Perpetual preferred stock should result in significant earnings growth in the near term. It also demonstrates the strength of our business plan and our team's ability to execute on it.
Over 10 years ago, we decided to expedite our growth strategy by acquiring value add acquisitions that would benefit from the implementation of our business plan. The biggest change to our historical business plan was the implementation of an aggressive rental home infill strategy.
We always believed the rental model would work well, but the results have exceeded our expectations and are a critical component of our success.
We have built a first class portfolio and an even better platform, we predict that in five years, our vacant sites will be occupied.
We are leaders in this industry and we must work diligently to increase the nation supply of affordable housing.
We plan to renovate older communities develop expansion sites and develop new manufactured housing communities.
In a relatively short period of time, we have a possible pipeline of over 3000 sites for future development.
Our industry should aim to contribute 100000 sites and homes annually.
This can be accomplished through the development of 500 communities containing 200 sites.
Our company serves an important mission for all our stakeholders.
We are the future of housing and the outlook for both the industry and UMH has never been brighter.
We will now begin the Q&A section.
Okay.
To ask a question you May Press Star then one your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Craig <unk> with B Riley you.
You May now go ahead.
Hey, good morning, guys.
Sam I think you'd mentioned you had about 300 rental homes and stages of set up last quarter.
Commentary you mentioned you now have 500, how are you thinking about the pacing of getting those homes already during the remainder of the year and are there any labor or supply chain issues that youre running into and getting those installed.
All of the supply issues are loosening up and improving and getting better and better.
What's interesting is to look forward five years and to look at all the hard work we've done.
Getting approvals to build expansion to make acquisitions with vacancies and.
The acceptance of the rental home product shows we can rent 900 homes per year. If we can create the supply and there is every reason to believe we can for the next five years and so if you look out five years and say, we're going to add 4500 rental units at better than $10000 per year.
We're going to have our 4% rent increases for five years, we're going to do 1000 units per year on acquisitions, and we're going to build 400 lots per year for five years.
The growth in <unk> over five years.
It's better than a 50% expense ratio better than meaning that the expenses are less than 50%.
It's extremely exciting for what it can do to UMH shareholders. So the supply constraints are easing and we are there is rental homes.
Being delivered to many communities and Theyre getting them set up Brett you see anything specific slowing us down no I don't see anything slowing us down I think we're getting to the point now where all of the work we've done ordering the homes getting them set up their coming online and they are starting to become occupied now should become apparent in the third and the fourth quarters of this year.
The good news about our positive results in 2000, and 2021 was we felt so many sites. The bad news was that the supply constraints that we hit then we basically depleted our inventory.
Now we've got those 560 homes on site with more being delivered in July of this year.
Which wasn't reported obviously, we did occupy 65, new rental homes, which was our biggest numbers since September of last year. So we believe we're turning the quarter and we should see pretty strong occupancy growth for rentals going forward, which will translate to both the top and the bottom line.
Sure.
Great I appreciate the color.
You did mentioned in your commentary about sales being hampered by inventory, but I'd be curious as to overall traffic patterns, where they are as strong as they were maybe a year ago and how its traffic has been trending here in the third quarter for sales.
Yes sales traffic is also very strong and again, it's really the same story as the rental home issue, we ran into with supply constraints on obtaining inventory, but our sales pipeline at any given time has between four and $5 million in pending deals and its really just a function of when we get those homes and when those deals.
Really close so.
As those homes that we have coming in gets fed up and get closed we do think that we'll be able to drive sales performance in line with last year.
We are pleased with our profitability overall, we're at 31% gross markup and that's over 27% last year and I should also point out that the last second quarter of 2021 at the time was a sales record. So that was a very good month last quarter or good quarter last year.
I would just add that the traffic is indicative.
Indicative of how much.
People, who need affordable housing like and desire of our product and why Theres waiting lists if you look at the history of the industry, which Jim Clayton wrote up till 2002, and its booked first to dream.
Following that was constraints on financing and then in 2011, we figured out go to rental homes and as of now 2021, I believe it is clear that our rental manufactured home and community is more desirable than apartments townhouses condos.
<unk> equivalent price ranges so.
This debt.
Means the long term demand for our product and the reason we should increase supply is there people want this product.
Okay I appreciate that.
And I think your G&A, it's been running around 4 million a bit more of a pickup here in the second quarter can you comment on what's driving that.
It's sort of a $4 million run rate's, a pretty good run rate for the rest of the year.
That is a good run rate we did have some onetime items in this quarter. We had some legal fees, we had some a lot of travel this quarter. So so.
Oh, sorry.
And of course that the seasons alone we have in that quarter, two so taking all that out.
It's a little bit higher than normal because of the travel and other professional fees, but other than that I think.
We are on target.
Okay, Great and I am curious to hear about the buyer pool for for manufactured housing communities right now you've done more acquisitions I think year to date than you did in the prior two years.
Has the rise in interest rates kind of knocked out some buyers you mentioned cap rates still remain very aggressive but has there been any move there to the upside.
If I may.
Because I've been around a long time I was around for the Volcker years.
And we were very surprised if that happened then when interest rates went.
To 12 14, 15%.
And amazing increase in the demand for manufactured homes. The manufactured housing industry has years of 200 250000.
Homes, because people could not afford.
Regulatory construct at home and then 14% interest rates were mortgages.
<unk>.
The downsize.
So without the housing is very hard to go without housing. So my expectation is that the manufactured housing industry will see a resurgence.
We are doing.
100000 homes I assume by the latest figures I think that today's we'll up to 112 120000 homes a year, but historically thats a very small number.
I'm anticipating that we will eventually go to 200 220000 homes a year as people, who can no longer forward with interest rates going up.
Three 4% to 5% and 6% in home prices going up 11 12, 15%.
There will be.
The need for affordable housing and we may be the only product in manufactured housing may do extremely well.
Staffing that <unk> will go up in price and I have payments will go up in price.
Other costs will go up with comparatively we will have an advantage.
And just add John .
Cap rates in the previous question.
We're seeing rates between four and 5% for the most part.
Better locations and higher quality assets are trading below that and some turnaround deals are trading within place numbers, a little bit above that.
I think that the buyer pool overall is still pretty strong, but theres certainly some buyers that relied on financing and as it.
Become less competitive on some of these deals.
I think it's a little bit too short term right now to consider it a trend, but that's just anecdotally what we're hearing from brokers on our context within the industry.
Yes.
Got it and are you working on any more transactions or should we expect any more acquisitions here in 2022.
Yes, we're working on contracts on two properties that we do have offers on we don't have them under contract right. Now so I really don't want to get into too much detail, but we do expect to grow the pipeline and close on.
Those two deals without <unk>.
Problem throughout the remainder of this year, it's about a $40 million additional pipeline I think it's a good time to touch on the opportunities zone concept and basically we discovered that there is more vacant land and more turnaround manufactured home communities and opportunities owns than anywhere else.
Because those areas by their nature are economically depressed.
There are communities that have not had capital investment.
Have not been well maintained have significant vacancies and land to be built where municipalities might want money invested and might want to community instead of fighting the zoning battle.
And with that in mind.
Sure.
We've looked at how opportunity zone funds work in UMH has created its own opportunity zone fund and it creates long term.
Our long term pipeline of communities for UMH in terms of just like the <unk> deal.
UMH will develop or rehabilitate.
Communities in the opportunity zone will earn fee income for doing that the opportunity zone fund will receive the <unk>.
Majority of the economic benefit, but then we'll have the first option to purchase the community. So we don't experience those.
Three to five year loss, turning around or building the community, but we experienced immediate.
Revenue.
For management, and then get to your first option to purchase the community.
And what we've learned over a six to 12 month period.
Is there are more acquisition and to be built.
Opportunities in those areas than anywhere else they happen to be longer term investments, but they exist.
Yeah.
Okay. Thanks for the time today guys.
Again, if you have a question. Please press Star then one.
Our next question will come from Keegan call with Brian Bird.
May now go ahead.
Hey, guys. Thanks for the time, just one quick follow up on the home sales point is the $30 million discussed last quarter is still a good number for the balance of the year.
So youre talking about gross sales of $30 million, we did 27 three last year.
It's achievable, but it's going to take a lot of things to break our way on the timing of inventory I think over the next 12 months going forward Thats very achievable to get to $30 million for this year possible.
But I wouldn't want a guarantee so the timing is the issue in terms in terms of sales were.
We're seeing higher prices per home the inventories, arriving youre going to see it.
New drone video that's going to come out very shortly of all of the homes that DUC River.
It has now arrived and are being set up so we're getting the homes setup for sale whether whether.
Whether we will have adequate closings by December 31 is up in the air.
We have more homes being delivered and more homes selling at higher prices than ever before.
Got it.
Shifting gears here a little bit so what was driving the decline in same store property rental home occupancy was it just a function of adding homes later in the quarter not leasing them up or are you seeing any sort of soft demand.
No I would not say, it's softness in demand I think that thats during COVID-19, our tenants to stay a little bit longer.
There are some that we needed to earn over and we are just now in the process of starting to turn those units over and.
Overall, we did add 238 units to our rental home portfolio overall occupancy it only increased by 109 units.
What we're seeing across the board throughout our portfolio no matter what market you are talking about is.
Plenty of demand to fill those units and plenty of demand to fill the units that we have on order so well.
While occupancy percentages down with $94 694, 8%.
It's still right in line with that 95% historical average and we do expect that to grow here going forward.
I want to point out.
Comparative advantage against conventional apartments.
We at one point were the 800, a month that they were at 11.
13, 1400 a month.
We're at $900 a month so.
<unk>.
We're providing three bedrooms two baths, there were only two bedrooms and one bedroom.
So that from the consumers point of view.
We really have a superior product at a superior price and there was a shortage of housing and the shortage of affordable housing. So we're very optimistic.
The rental program will continue full speed ahead.
Sales will also be reasonably good but the year.
The future of the company right now is the rental program and we have 2500 3000 vacancies and.
And we see no reason why we can fill them with rentals.
Got it.
Think about same property community operating expenses they were up over 8% in the quarter. Just wondering if you guys could go into a little bit more detail on what the drivers of that word.
Well some of it.
We had spoken about in the first quarter relates to.
Salary increases in employment.
Increases we did have additional employees this quarter.
We were running a little light in previous quarters that we were able to do the hiring this quarter. So that was the big change. We also had some water and sewer and some tax increases so that played a major role in the increase in <unk> in <unk>.
Expenses.
Got it and then last one for me could you just maybe walk us through the accounting on the preferred redemption that was announced in the quarter could actually completed subsequent to quarter end, just trying to kind of reconcile.
Within the numbers there.
Right, because we had announced that we will be.
Deeming the preferred stock GAAP requires us to pull it out of equity and put it into the liability. So that is what we did so there was a reclassification from the equity of $247 million to liability. So we increased liabilities.
By $247 million.
Yeah.
Okay got it thanks for the time guys.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Samuel Landy for any closing remarks.
Okay. 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 Brett and I are available for any follow up questions. We look forward to reporting back to you in November with our third quarter 2022 results. Thank you.
Yes.
The conference has now concluded thank you for attending today's presentation.
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