Q2 2019 Earnings Call
Good morning, and welcome to you our MH properties second quarter 2019 earnings Conference call.
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Please note this event is being recorded.
It is now my pleasure to introduce your host the Snowy Madden director of Investor Relations.
He was Madam you may begin.
Thank you very much operator.
In addition to the 10-Q that we filed with the F 15 yesterday.
We have filed and I look at the second quarter supplemental information presentation.
The supplemental information presentation, along the dark since you are available on the company's website at your major Duck Creek.
I would like to remind everyone that certain statements made during this conference call, which are not historical fact, maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
The forward looking statements that we make when this call are based on our current expectations.
And then about 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 the expectations will be achieved.
The risks and uncertainties that could cause actual results to differ materially from expectations.
Oh, you don't in the company's second quarter 2019 earnings release and filings with the Securities and Exchange Commission.
The company disclaims any obligations to update its forward looking statements.
In addition, during today's call, we will be discussing non-GAAP financial metrics.
The conciliation of these non-GAAP financial metrics to the comparable GAAP financial metrics as well as explanatory. Unfortunately, many of which are included in our earnings release.
Our supplemental information and our historical HST filings.
Having said that I would like to introduce management with us today.
Eugene Landy chairman.
Samuel Landy, President and Chief Executive Officer.
And they chew, Vice President and Chief Financial Officer.
And bad debt Vice President.
It is now my pleasure to turn the call over to your mattress, President and Chief Executive Officer Samuel Landy.
Thank you very much nelli, we're pleased to report our results for the second quarter ended June Thirtyth 2019, our business operations continued to progress as expected our topline income and sales growth coupled with improved same property occupancy rate.
Continue to validate our business plan.
Rental and related income for the quarter was up 11% over last year sales were up 51% over last year and same property occupancy is up 140 basis points or 301 units.
The improvements that we have made in our communities has resulted in increased demand at our locations.
Normalized FFO per share for the quarter was 14 cents as compared to 18 cents last year, representing a decrease of 22%.
This decrease in per share FFO can primarily be attributed to our recent preferred issuance and a reduction in dividend income from our reach security portfolio.
During the quarter, we issued 100 million of our 6.75% series C perpetual preferred stock.
This transaction will allow the company to accomplish our future growth objective, but as a short term dilutive effect of three cents on our second quarter earnings.
As we deploy this capital into new acquisition rental homes and expansion our earnings will rise accordingly.
We are also still feeling the impact of the reduction in our dividend income from our REIT securities portfolio.
This had a negative impact of approximately one cents.
As we have already stated our business plan its long term in nature.
Typically it takes two to three years for value added communities to become fully accretive to earnings.
The value created by our business plan is demonstrated by our most recent community refinancing subsequent to quarter end, we obtained two mortgages totaling approximately $39 million.
Two of the three communities included in these loans had existing mortgages with a balance of approximately $11.6 million.
These two communities appraised at $19.8 million in 2009 as compared to $40 million this year.
Representing an increase in value of 102% over the 10 year period.
Hey appreciation of our properties is a fundamental component of our long term business plan.
Many of our encumbered properties also exhibit similar appreciation, which will be realized when they are refinanced.
During the quarter as mentioned, we enhanced our financial strength by issuing 4 million shares of our 6.75% series C perpetual preferred stock.
Resulting in net proceeds of approximately $96.7 million.
Well this issuance had a short term diluted impact on our earnings of approximately three cents. This quarter. This is expected as it takes time to fully deploy the proceeds.
We are working to deploy this capital into new acquisitions rental homes, and expansions, which will improve our earnings.
In 2020, our high coupon, 8% series B preferred stock is callable, which should allow us to increase our earnings further by reducing our overall cost of capital.
Subsequent to quarter end, we closed on the acquisition of three communities containing 1100 sites for a total purchase price of approximately $31 million or $28000 per site.
The blended occupancy rate for these communities was 54% at the time of acquisition.
These communities are well located and will benefit from our marketing sales rental and capital improvement programs.
We are optimistic about our recent entrance into the Perry's brick, Ohio market.
We have acquired approximately 1150 total sites in this market of which only 55% our occupied.
These vacant sites present tremendous value add potential given the strength of the immediate employment market.
These communities are located near a few got Chrysler manufacturing plant, a large Walgreens distribution center and a brand new first solar manufacturing plant.
It was also recently announced that the 700000 square foot fulfillment center is being developed for Amazon.
This fulfillment center is expected to create at least 1000 jobs with the possibility to grow to 3000 jobs.
The transactions required $23.5 million in equity.
For which we utilized some of the proceeds from our recent preferred offering.
We have one additional property under contract, which is expected to close within the next few weeks.
The acquisition market remains extremely competitive.
Property valuations in our sector remain at all time highs. We continue to seek acquisitions that are accretive to earnings and meet our acquisition criteria.
Home sales continue to accelerate throughout our portfolio gross sales for the second quarter were $5.8 million first $3.9 million last year, representing an increase of 51%.
Year to date gross sales are approximately $9.5 million for $6.4 million last year, representing an increase of 49%.
Year to date, we have sold 159 total homes, which is an increase of 28% over the prior year.
Our average sales price improved to approximately $60000 first approximately $52000 last year.
It is also noteworthy that for the second quarter, our sales generated a net profit.
Of $178000 as compared to a $288000 loss last year.
We believe we can continue to grow sales volume and profitability.
Our same property results continue to come in strong year to date same property income increased 7% same property expenses increased 10%, resulting in a 4% increase for same property NOI.
Same property occupancy for the year is up 140 basis points or 301 newly occupied units.
Our same property expense ratio for the second quarter was 44.4% as compared to 42.9% in 2018.
Increasing occupancy by 301 units resulted in higher than normal expenses, but will generate approximately $900000 in new revenue over the next 12 months effectively reducing the expense ratio in the future.
Our average site rental rate as of the end of the second quarter is $451 as compared to $437 last year, representing an increase of 3%.
Our average home rental rate, including site rental for the same period is $759 as compared to $737 last year, representing an increase of 3%.
We are pleased to announce that we have broken ground on three expansions and expect to begin development at several more later this year, we expect to deliver 170 sites in 2019 645 in 2020 and 580 in 2021.
The development process is tedious and cumbersome, but we are satisfied with our ability to get expansions approved and develop these expansions will help to drive additional home sales income as the sites come online.
There continues to be a shortage of quality affordable housing across the nation. We are seeing strong demand for our products across the portfolio. Our communities are in markets with improving demographics growing employment base and rising wages.
This has resulted in sales being stronger than they have been in at least a decade. Our rental program performance continues to perform very well we have consistently proven that our business plan of acquiring value add communities and improving them builds long term value for our shareholders.
Over time this has allowed us to build an irreplaceable portfolio of high quality communities.
And now and it will provide you with greater detail on our results for the quarter.
Thank you Sam.
Funds from operations or FFO was $5.7 million or 14 cents per diluted share for the second quarter of 2019 compared to $6.2 million or 17 cents per diluted share for the prior year period.
Normalized AFFO, which excludes realized gains and losses on the sale of securities and other nonrecurring items was $5.7 million or 14 cents per diluted share for the second quarter of 2019 compared to $6.7 million or 18 cents per diluted share for the prior year period.
As Sam mentioned.
This decrease in per share FFO is primarily attributable to the impact of our recent capital and a reduction in dividend income from our securities portfolio.
Rental and related income for the quarter was $31.4 million compared to $28.2 million a year ago, representing an increase of 11%.
This increase was primarily due to community acquisition. The addition of rental homes and the growth in occupancy.
Unity and NOI increased by 6% for the quarter.
$15.5 million in 2000 $18 million to $16.4 million in 2019.
Our normalized operating expense ratio.
Increased to 47.7% from 45%.
The increase in expenses can be attributed to increases in sewer rental home turnover and the growth of our community level staff.
We have also paid increased incentives due to the occupancy as an additional 301 site during the year.
We expect the expense ratio to decline as new revenue originated during the first half of the year offset the increased expenses.
As we turn to our capital structure at the end of the second quarter, we had approximately $366 million in debt of which $327 million was community level mortgage debt and $39 million were loans payable.
91% of our total debt fixed rate.
The weighted average interest rate on our mortgage debt was 4.3% at the end of the second quarter 2019.
Compared to 4.2% in the prior year and 4.3% at year end 2018.
The weighted average maturity on our mortgage debt was 5.8 years at quarter end compared to 6.4 years a year ago.
Subsequent to quarter end, we completed the financing refinancing of three of our communities with total proceeds of approximately $38.8 million.
The Fannie Mae mortgages are at a fixed rate of 3.41% with 10 year maturities and principal repayments based on 30 year amortization schedule.
Proceeds were primarily used to repay the existing 5.94% mortgages, which had a total balance of approximately $11.6 million.
These new loans will further reduce our weighted average interest rate and lengthen our weighted average maturity.
As of quarter end, you may have a total of $389 million in perpetual preferred equity.
Our preferred stock combined with an equity market capitalization of $498 million and out $366 million in debt.
Results in a total market capitalization of approximately $1.3 billion.
From a credit standpoint, our net debt to total market capitalization was 29% our net debt less securities to total market capitalization was 20% our net debt to adjusted EBITDA was 5.6 times.
Our net debt less securities to adjusted EBITDA was four 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 $3.7 million in cash and cash equivalents.
$75 million available on our credit facility and $20.7 million available on our revolving line of credit for the financing of home sales and the purchase of inventory.
We also had $107 million in our securities portfolio encumbered by $10 million in margin levels.
This portfolio represents approximately 9.5% of our undepreciated assets.
Although the weak market experienced high volatility over the past 12 months.
Is a long term these securities generally performed in line with the underlying real estate.
We limit our portfolio to no more than 15% of our undepreciated assets.
Without strong financial position, we are poised to continue our growth initiatives.
And now let me turn it over to gene before we open it up for questions.
We are very proud of the business. We are in the portfolio that we have built.
Manufactured housing is the most efficient and practical way to meet the affordable housing demand that America.
We can provide a quality home at a safe community that is affordable for low to middle class families.
This is being recognized by our elected for specials and we anticipate both some regulatory relief for the industry in the coming years.
And improved financing terms for affordable manufactured housing.
[noise] recently hubs Secretary Dr., Ben Carson organized the innovative housing showcase on the National Mall in Washington DC.
You'll MH sponsored a single section on to show on the mall.
The excellent exposure that our product to receive from this event cannot be overstated.
As we look to the future of this event the need for affordable housing may lead to Greenfield development opportunities for you to make.
Further president Trump signed an executive order in June directing federal agencies to work together to facilitate the production of affordable housing.
The executive order focuses on alleviating barriers that impede the production of affordable housing.
The order also created a white house council on eliminating barriers for housing development and one of its goals is to adjust federal programs to incentivize localities to reduce regulatory barriers well condition federal funding on such reductions of local impediments, such as zoning and land use restrictions. These are all very positive developments for our industry.
The fundamentals of our business have never been better the need for affordable housing will be with us for a long time.
The strength of both our sales and rental operations is encouraging as the company continues to grow we will we will be able to operate more efficiently.
We are well positioned to fill out 4000 vacant sites and also obtain modest when increases of 4% per year.
Achieving both of these goals will result in significant earnings growth.
As our community and I'll I improves we can refinance our properties effectively realizing property appreciation without selling any assets that capital can then be reinvested into our core business well distributed to shareholders.
We will now be happy to take your questions.
Thank you.
We will now begin the question and answer session.
So you ask a question Newman from Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset pressing the keys.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Rob Stevenson of Janney. Please go ahead.
Hi, good morning, guys.
Sam you indicated you had one property under contract that you expect to close shortly what does the pipeline look like behind that on the acquisition side.
I'm going to let Brad answer that go ahead, yes, so that property a it's a 386 eight community 86% occupied it should close within the next few weeks behind that we don't have anything under contract at the moment, we are exploring several acquisition opportunities, but pricing hasnt been in line it happened.
Really wanted to get as aggressive as some of these deals are trading for so we're working to build the pipeline, but at the moment it is empty.
Okay, and then Sam can you talk about.
Expectations for occupancy going forward, where are you experiencing stubborn pockets of vacancy where theres not much demand versus places where are you.
All you need to do is essentially put a rental home on a site and you can get occupancy up.
Can you help us think about how we should be thinking about that heading into next year.
Well first our 300 unit improvement in occupancy is the best we've ever had you know that's the equivalent of building in filling a 300 space community in one year, so that was incredible growth and each of the regions.
Is growing.
Yeah, Yeah, I'm, just looking at the list but.
You know there has been a strength in all our markets over the past 12 months and it's getting stronger.
The.
The only problems in accelerating our growth.
It's difficult getting set up crews and rain is slowing it down but as a general matter. We expect to go forward faster now than we did a year ago demand seems stronger our marketing is working people except the product.
Rentals and the sales growth, but 50% is phenomenal and so.
Really appears that what weve done improving these properties and marketing those improvements has worked tremendously and people out in the field are busier than ever and all our markets I can't think of one that's going backwards.
Well I guess, what what's limiting you from increasing the number of rental units that you put in place next quarter by an incremental 25 or 50 over what you did this quarter over first quarter I mean, what's limiting the acceleration of that program is that the availability of the homes is the demand from the renters forward can you help us understand that so the first quarter. It was just winter slowed down the setup of homes, but from here forward I don't think anything's going to slow it down.
You have issues getting enough set up crews and going fast enough there, but in terms of demand and the communities. We have acquired the new communities in Indiana, and Ohio demands exceptionally strong and there's plenty of vacant sites to go faster. So we have that potential and we're working on it.
Okay, because I mean, if I look at it you did 183 rental communities in the second quarter of 19 versus 224 in the second quarter of 18, and just trying to figure out whether or not there was something fundamental that sort of caused.
Essentially a 40 unit decrease year over year or whether or not.
So that picks up and we see.
260 in the third quarter or something like that.
Yes, I just wanted to add one thing to that sent Sam had mentioned the winter, but it's also been a very wet spring, it's been very hard to spot. Some of these homes on site. So pair that with the shortage and set crews and that's why you see the reduction of 40 over last year.
Okay, but add up.
Yes, and I know you usually have the annual meeting.
In the second quarter Gionee anything else abnormal driving that increase this year.
No DNA, what we saw was approximately.
The same as it was last year. So I think we're okay with that we do expect it to go up a little bit towards the end of the year.
Due to increases in personnel as well as some increase space that we may be taking.
Okay, and then did you guys make any buys in the securities portfolio this quarter.
Minimal I mean, I think what we usually do is we do the dividend reinvestment for the mom must reach shares but that was about it.
Okay, and then remind me Monmouth is basically tapped out and said that they are not doing any more investment other than their dividend reinvestment and you guys are you guys have the same program at this point in time, yes pretty much though.
Okay. Thanks, guys.
Our next question comes from Barry Oxford of da Davidson. Please go ahead.
Oh, yes, thanks, guys.
Sam could you give us a little color into a home sales and where you see that headed.
Over the next 12 to 18 months.
So we've been working every year on creating a real sales company and making sales a big part of you on H. properties.
The fact that sales are up 50% and that they were now profitable proves is working.
At this moment, we're increasing the size of the Port Royal sales center, adding mill, a multi storey house in a modular all these things add to your expenses, but we're doing it because our people are proving they can do outside of the community land home deals we can sell in the communities.
And we have the ability to continue to grow sales and to take.
The sales centers at existing communities.
And increase the volume of the sales they do both through the community and outside the community doing land at home. So you know it's difficult to put a percentage on it or tell you how quickly it will happen, but each manager that gets there first commission check becomes a better salesperson and we just see the ability to continue to grow this and grow its profitability.
The United States is short.
234 million units of affordable housing like that that's a and the shortage is growing each year. We are not building anywhere near the housing we build a decade ago. The manufactured housing industry is only a 100000 units a year for decades, we with 200 or 250000 units a year. If this industry comes back to what it was to satisfy the need for affordable housing we're talking about the industry doubling in size for that reason you I made with a 122 communities once they're not only have a sales operation and each of those communities, but we intend to have 345 regional centers and participate in the growth now we have to see whether the government helps with financing being available and if the economy continues to expand into the country does succeed and of filling the need for affordable housing. So if this occurs if you will.
It will be a very profitable participant.
And that well.
Great. Thanks, so much for the color guys.
Our next question today comes from Albert <unk> Prospect Advisors. Please go ahead.
Thank you good morning.
Hi, I have a couple of questions, maybe a little bit more than a couple, but first where there any sales from the securities portfolio.
No we didn't sell anything in the securities portfolio.
Well today, we also as I said before did not purchase anything except for the dividend reinvestment and weve been keeping our portfolio.
At the 9.5% as I said before we're not going to go over 15%.
But as we grow our assets in our core business without acquisitions that percentage should decrease.
Okay.
I guess, what I'm trying to understand is.
Historically, you've you've issued a lot of stock I mean is it.
Shares outstanding have gone up quite a bit.
I know you probably feel that your securities portfolio is undervalued, but so is it your stock.
I guess.
Why would you issue so much stock in the quarter.
And not.
Not sell anything out of your securities portfolio surely there must be something in your securities portfolio that that you feel.
Your stock represents better value.
In one of the positions.
Well, let me try to help you with that go to that question you know one of the great developments assistant in the last few days, though it's a continuation of something that we've seen for a considerable period of time, we issued four years ago 100 million of 8% preferred.
We're putting this company in a position that in October next year 2020, we tend to call that preferred and so we will we're budgeting a three four or $5 million and increase earnings who the simple expedient of paying down a high cost per foot.
Right when we issue the buffer at 8% we used to joke that we issued the buffer today, what parts at six and seven cap and we're going to make a lot of money well. We certainly did the 100 million. We issued we used to buy to 300 million in parks that are much more valuable today than they were when we issued the capital so that but for the.
The having a highlight in $10 million is about a 108 million today of liquidity gives me.
I'm most confident that October of next year, we're going to call the $195 million 95 million 95 million of 8% preferred and replace it hopefully to what I have 3% that oil even just sell some securities and pay it off so.
The.
The trend towards lower interest rates helps us and this one capital.
Move that helps us and on top of that.
The low interest rate climate, we have.
Hundreds of millions and that was at a low over well increase the debt and be able to borrow Anna what did the last bar at what interest rate, 3.41% April and for 1%. So we've kept the company liquid. So we realize that the securities portfolio has gone down in value and that we've seen a reduction in dividends, but it still gives us a lot of liquidity and confidence to realize a future plan.
Well when I take a look at particularly to diluted shares outstanding were 39.9 million.
At the end of the second quarter or I guess, maybe during the quarter, but any ways looking at it at the end of 2014 was 22.5 million.
So that's quite an increase in the shares outstanding it actually works of if I did the math correctly 13.
On the annual growth rate of 13.6% I don't want to go up there, but I don't think your numbers right.
We've been issuing about a $3 million worth of stock or.
Month, 36 million, a year with a dividend reinvestment $40 million.
And we have been.
Investing a 100 to 150 million a year ago, we continue to issue equity, though we we.
Mega City milestones things change you know yeah. The the company changes every time and we're growing the company, where we're putting in 800 wells a year. They use the cost is 32 million I think that.
800 would be closer to $40 million, a year and we've done very well in the acquiring parks and they've been very profitable. So that the the situation is that you have to issue some equity.
We sold and four days to 100 million in preferred well, we better because everybody had competence and our strong financial statement. So we do recognize that the net asset value of our stock is higher than the car companies current market price and to that extent it baby below book value. We don't think it's dilutive of earnings as some good or not I was also going to add that over the last five years. We've also had a total return of 80%. So yes, we did issue shares but those shares were used to grow the company and.
And also to give we turned up bigger return to our shareholders.
Okay can I just ask one more question.
Sure.
Oh, Yes, I'm just I was looking at your peers I was looking at Sun communities that I was looking at equity like sell properties.
And over the last two years communities.
Price is the price return I'm pretty sure I got this right and I'll take a look at my numbers on shares outstanding but.
Sun communities is up 59% equity lifestyle properties is that it's up.
50% over the last two years on a price basis, you want me to is down 18% over the last.
Two years.
Is there something.
How do you explain that is those numbers.
Good good it's a good question so.
In the beginning Sun communities started with rentals three years before you and me so we need to catch up there, which we are doing.
Additionally, liquidity is value the more shares you have outstanding the larger your company is.
The lower the cap rate you trade at so that's some community stock and he LSW.
Art, yielding 3% or less and were yielding over 5%.
Size alone will could potentially double our stock so our yields becomes the sale.
Additionally, our business plans are different.
They are buying.
Communities that increased FFO because.
They can buy at a four cap and their cost of funds is a three cat and thats accretive. So these 95% occupied perfect condition communities that they can acquire are accretive to them because of their low cost of capital. We're doing something different that is actually much more value add as indicated by the communities Weve refinanced at 10% per year growth in value.
And what that is is you buy these 60 or 70% occupied communities that takes three years to turn around that actually decrease your FFO. The first couple of years you own them, but at the end of a five year period theyve increased in value more than 50% and our returns will actually some day be greater than Sun City LSW is when we can demonstrate to the market the increased value as these properties and as we get more of the.
Revenue growth in communities can operate efficiently until they are over 80% occupied so when you hit that point and the revenue growth becomes new earnings that we show that earnings growth.
People are going to notice that you are matches trajectory of increased earnings and FFO exceeds the other companies and our stock will do better and to go a step further along that we were well on the way to doing that and this quarter only had two setback that that stop people from seeing exactly what I'm, saying and the one is $2 million less in dividend income from the REIT securities portfolio and the second is issuing the $100 million in preferred stock, which costs money today and doesn't add earn money till tomorrow, so but for those two things you would see that everything I'm, saying is already drilled and the stock could react to react to it today anyhow or it could react later.
Okay gentlemen, thank you so much and ladies thank you so much for your time.
Our next question.
From Merrill Ross from Compass point. Please go ahead.
Thank you and good morning.
My question is in absence of an acquisition pipeline.
Is there any way.
Yes in community stabilization.
With greater efficiency and shorten the timeline to stabilization.
You know I realize that.
Mark It Doesnt want you to spend money and then earn a return over three years. They want you to spend money and earn a return.
That you just answered that question I'm, just wondering if maybe because there is so much better value creation in stabilizing those communities.
I'm wondering if there's any way to make it more efficient.
Well, we're working on efficiency Daniel talk about what we're doing for efficiency.
Yes, so our efficiency.
They get a better handle on expenses.
Selling meters on even more units we have 4500 total units that are not.
Metered and on public water, we're going to do 1200 units this year.
On top of that we're doing a lot of stuff with software. So we're going to have.
Real time updates every day of what the master meter read at each community is saying for how much water is flowing out and the software immediately alerts if it exceeds a certain amount per unit and alert the manager us at corporate and the regional so the faster we get on top of leaks and high usage the faster we fix it and the faster we can drill that expense.
Additionally, we're going to automate more.
At the.
Muni offices for paperwork getting people to pay online more this will reduce the need for extra help as the community office.
Which should help control.
Some of the growth in.
And stuff like that and the final item is.
Although a software.
We're going to have even more detailed analysis and.
Basically certain items, we've heard just such as tools.
Make sure that no communities are ordering an excessive amount of tools as well as.
A better understanding of what we buy and.
Essentially when we buy were going to bias the most cost effective way.
That is like we might have data on.
For example, something like how many hamburgers me or something like that and combined with purchasing power.
And effectively purchase these cheaper anvil.
And I'd point out any color.
Go ahead, yes.
Okay.
You mentioned the regional sales centers you if that one that you referred to is that a regional center at this point.
Yeah, Brett talk about the one that's doing so well, yes. So we have two regional sales centers, we have the one in Melbourne in Pennsylvania. They have a pipeline of about 12 homes right now so that's very encouraging.
And then we have or Anderson, Indiana sales Center, which is also a regional sales center they've done about 430000 in sales this year, but they have a five home pipeline with about 700000 in sales, but they also have another four or five communities that will do for four or five homes sold within the community. So we do expect those to continue to grow as we are able to build our pipeline up at those locations.
Are you going to add more.
Yes, yes, there's other.
Communities can you grow up Heather Highlands.
Suning acres.
So we have additional communities to work on sales.
Thank you.
And our next question today.
Comes from Craig.
Oh.
Oh. Please go ahead.
Hi, good morning.
I wanted to talk about your selling expenses first on the manufactured homes can you give us some color on sort of how we should think of the fixed versus variable cost there.
Going forward.
Yes, so the.
The fixed costs.
You've got your cost of sales of what's the cost of the home and the homes are marked up 30% you have your variable cost, which I would consider your marketing your commissions.
Your.
You know you have to heat. These homes you have to pay taxes on them.
Right a lot of the our costs and selling expense is fixed because it's the marketing expense, which we have the marketing budget it.
Employees the salaries of these employees. So all that goes into our selling expense. So a lot of that is.
Pretty much saying I want to point out what a wonderful team. We have we had less than a week's notice of the opportunity is playing a home on the Washington Mall and within that we purchased the home moved it to the mall set it up had a wonderful reaction to the display both from a representatives and the public and then of course, you have to pay the house down and moving back to where we're going to ultimately sell it. It was in terms of dollars. It was expensive thing in terms of public relations and helping the industry and helping us on a long term plan you can the.
Yeah, I have to say that that's going to the best public relations.
Program, we've ever had and of course, we have it on videotape and we hope that eventually you will go to our website and see the display and see the secretary of housing of a rousing speech in favor of manufactured housing. So it was certainly a money or more than well spent.
Okay, well, let me let me ask you a little differently I guess, a couple of quarters ago, you sold about four in the 4.6 million in homes and I think your selling expenses were about two cents in this quarter. There were there were three cents a share.
I guess should we think that that $1.3 million as sort of a decent amount of selling expenses. If you continue to sell about 6 million a quarter or were you know is it does is it going to vary if you accelerate sales even more because the marketing spend or how should we think about that.
So there are increased expenses because we.
Our confidence is high and we are working on growing the sales so that take the port Royal sales office, there's one extra new employee with no new closings yet and.
That's going to be the situation as we see a market that's working well, we're going to be employing additional people, bringing in additional homes doing additional set up where it but you know by the end of 12 months. The object of this is that it adds profitable revenue so.
You know quarter by quarter.
You know, especially at this time of year the expense.
The expense may grow as a higher percentage than the income, but we expect the end result is going to be the income grows more.
Okay.
Going back to last quarter I think you were talking about a pipeline of about 1200 units at 45 million you closed I think $31 million year.
Early in July and have another asset.
Did you pick up another community quickly and as we look to what's supposed to close in the next few weeks, what's the dollar value of that community.
Yes, so the.
Blanking on exactly what it was that to be a double of what we reported in the last quarter, but we did get two additional properties under contract since that call. So I believe that's what we're talking about there those were two communities 285 sites in the Pittsburgh market for 11.65 million. The one property under contract now is about a 25 million dollar deal. A there is a 12 million dollar loan being assume so we'll put out another 13 million in equity to get that deal done.
That's in Erie, Michigan, or very close to our various bird properties. Its a very high in community and we're excited to add to our portfolio.
And I know the occupancy on the acquisitions that you closed already this quarter was was was low even for you guys on average.
But what's sort of the going in.
Kind of year, one cap rate on the acquisitions, you're expecting to close here this quarter.
So the.
The going in cap rate on the deals that we closed this quarter was about six and a half person, but that being said, we will be increasing expenses to turn these communities around I just want to point out a few things about our previous acquisition. So in 2017, we acquired 2000 insights at those acquisition, we've improved occupancy by 230 units since the time of acquisition 56 of those units being this year. So those properties have performed very well and are now operating at a 48% expense ratio and we were earning somewhere around 7%. There. So that's very good in 2018 last year's acquisitions, we've actually lost occupancy by 24 units. This year, we've improved by 14 units.
Obviously, we're still completing the turnaround work at these properties our operating expense ratio is 64% there. So as we're able to bring that operating expense ratio to 50%, we'll see an additional 425000 to the bottom line at the current revenue level. Obviously, we'll also be growing revenues. So that's kind of a picture of what should happen with these newer acquisitions coming up here.
And most importantly, we're buying them for 28000, a site and when you get up to the 90% occupancy and do the improvements replacement cost to 70000, a site and there's really no reason the value won't be 70000 a site.
Okay, one more for me.
On the expansions that you're delivering this year I think you mentioned, maybe a 170 this year.
Almost 640 in next year.
How should we think about what the incremental cost is on a per site basis, just from a use of capital and capital needs perspective.
So we expect to invest $70000 per site in the construction of the site and then first phases to negatively impact.
Operating income because you're spending money on marketing you have a person in the office you're doing all those things and you have to fill the site, but the purpose of it is you're hoping to make $30000 per sale and the expansions and collect the lot rent so.
You know it takes time, but.
Fairview Manor Highland as states. Those are places we made significant money building site and we expect that that's what's going to occur with the expansions we're building today.
Okay. Thank you.
And ladies and gentlemen. This concludes your question and answer session I would like to turn the conference back over to the management team for any final remarks.
Thank you operator, I would like to thank the participants on this call for their continued support and interest in our company as always gene Anna and I are available for any follow up questions. We look forward to reporting back to you after our third quarter. Thank you.
Thank you Sir todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.