UMH Properties, Inc. (NYSE:UMH) Q1 2023 Earnings Call Transcript

UMH Properties, Inc. (NYSE:UMH) Q1 2023 Earnings Call Transcript May 10, 2023

UMH Properties, Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.03.

Operator: Good morning, and welcome to the UMH Properties First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. It is now my pleasure to introduce your host, Mr. Craig Koster, Executive Vice President and General Counsel. Thank you. Mr. Koster, you may begin.

Craig Koster: Thank you very much, operator. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited first quarter supplemental information presentation. This supplemental information presentation, along with our 10-Q, are available on the company’s website at umh.reit. We would like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved.

The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company’s first quarter 2023 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements. In addition, during today’s call, we will be discussing non-GAAP financial metrics. Reconciliations of these non-GAAP financial metrics to the comparable GAAP financial metrics as well as the explanatory and cautioning language are included in our earnings release, our supplemental information and our historical SEC filings. Having said that, I would like to introduce management with us today. Eugene Landy, Founder and Chairman; Samuel Landy, President and Chief Executive Officer; Anna Chew, Executive Vice President and Chief Financial Officer; Brett Taft, Executive Vice President and Chief Operating Officer; Jim Lykins, Vice President of Capital Markets; and Daniel Landy, Executive Vice President.

It is now my pleasure to turn the call over to UMH’s President and Chief Executive Officer, Samuel Landy.

Samuel Landy: Thank you very much, Craig. I would like to thank all of our loyal shareholders for their dedication to the company. We are pleased to have raised our annual dividend $0.02 per share or 2.5% in January. Over the past 3 years, we have increased the dividend by 14%. We look forward to additional increases in the future as we achieve increased earnings per share through the implementation of our long-term business plan. Normalized FFO was $0.20 for the quarter as compared to $0.19 last year, representing an increase of 5.3%. As we fill our vacant inventory, improve our operating margin and grow our sales profitability, we believe we will earn well in excess of our dividend with a target payout ratio of 80%. During the quarter, same-property occupancy increased by 100 basis points or 258 units to 87%.

Gross sales improved by 70% to $7.3 million, which is a first quarter record. Most of the increase in occupancy was generated in March. Therefore, the revenue growth from this occupancy gain should be reflected in our second quarter results. Additionally, we are coming into our peak selling and renting season, which should result in further growth in occupancy and sales profitability. One year ago, our results were impacted by a lack of inventory to sell and rent homes which resulted in limited revenue growth for most of the last year. The COVID-related supply chain issues that had existed, combined with strong consumer demand for homes, resulted in manufacturer backlogs of 8 to 18 months depending on the factory. In our efforts to solve that problem, we ordered over 1,000 homes.

We are on track to fill approximately 100 homes per month over the next 6 months. Carrying 1,000 homes is 500 homes above our normal inventory and means we have taken on a higher debt load, increased interest expense and increased carrying costs. Each month, as we reduce inventory, we should see increased income and reduced floor plan interest expense and carrying costs. The norm of manufactured housing is that we can order homes at the right price and have them ready for occupancy in 4 to 6 months from the order date. A return to this norm should allow us to carry less inventory, thereby reducing expenses and further improving earnings. During the first quarter, which is typically one of our slowest quarters, we converted 230 of our inventory homes to rental homes and sold 39 new homes.

The increase in occupancy in conjunction with rent increases implemented in the first quarter generated an increase in monthly rental charges of approximately $550,000 as of April 1, 2023 compared to January 1, 2023. Demand remains strong throughout the portfolio, and we should be able to drive similar occupancy and revenue gains over the next few quarters. Our same-property results are in line with our expectations and continue to trend in the right direction. During the quarter, same-property occupancy increased by 258 units or 100 basis points. Our same property rental home occupancy rate increased from 93.5% at year-end to 93.9% at the end of the first quarter. Our same-property monthly rent per site increased 4.5%, and our same-property monthly rent per home increased 6.3% year-over-year.

These improved operating metrics resulted in same-property income growth of 6.1% with expense growth of 6.8%, resulting in same-property NOI growth of 5.6% or $1.4 million over the first quarter of last year. Our expense ratio decreased sequentially from 42.6% in the fourth quarter to 42.1% in the first quarter of 2023. The occupancy of our inventory should result in accelerated revenue growth this year. That revenue growth, assuming similar expense growth experienced in the first quarter should result in high single-digit NOI growth this year. Gross sales for the quarter increased 70% to $7.3 million as compared to $4.3 million last year. Our gross sales margin improved to 32% from 30% last year. Net income from sales was $236,000 as compared to $103,000 last year.

As we return to normal inventory levels, the profitability of our sales division should increase further. Included in net income are higher interest expenses and elevated inventory carrying costs. During the quarter, we sold 83 total homes of which 39 were new homes. Our average new home sales price was $136,000, and our average used home sales price was $45,000. We are financing approximately 76% of our home sales. We have a total of $68 million in home loans on our balance sheet that earns us an average interest rate of 6.7%. On the acquisition front, we acquired one newly developed community in Georgia containing 118 sites for a total purchase price of $3.7 million. This community was acquired through our opportunity zone fund. We anticipate strong demand for rental housing in this market.

We continue to seek opportunistic accretive acquisitions that meet our growth criteria, but there are limited opportunities that fit our criteria. Last year, we acquired 7 communities containing 1,500 sites and an additional community containing 144 sites through our JV with Nuveen Real Estate. We are making progress implementing our business plan at our recent acquisitions and anticipate an improvement in operating results at those locations this year. We also continued to make progress filling our joint venture communities with Nuveen and hope to grow that venture in the future. On the expansion front, we are under construction of 4 communities to develop 216 lots. These expansions are located in Maryland, Pennsylvania, Tennessee and Indiana.

All in all, we are very satisfied with our quarterly results, but we want our shareholders to understand our success is based on our willingness to invest in and work on projects that typically take 3 to 5 years to be accretive. Our industry and the entire business world are extremely competitive and looking for investments that will be immediately accretive. Therefore, there is a scarcity of such investment opportunities. On the other hand, when you invest time and money in projects with a 3- to 5-year time horizon, you have limited competition and a much higher chance of success. UMH has utilized this long-term business model to grow into one of the largest community owners in the country. We own 135 communities containing 25,700 home sites that are approximately 85% occupied.

We also own 2 communities containing 363 sites in Florida through our joint venture with Nuveen Real Estate. Additionally, we own 9,300 rental homes and will own over 10,000 rental homes as we fill our inventory. We have 2,100 acres of vacant land that can be developed into 8,400 sites. This vacant land and our existing 4,000 vacant sites provide us with a long runway to grow earnings organically for the foreseeable future. We have the proven ability to acquire and improve communities, develop new communities and expansions, operate self-storage facilities are joining our communities, profitably selling finance homes and lease oil and gas rates in our energy-rich locations. We are also exploring the possibility of solar energy to further increase affordability for our residents while having a positive environmental impact.

UMH is well positioned to grow income and per share earnings through the successful implementation of our proven business plan. And now Anna will provide you with greater detail on our results for the quarter and for the year.

Anna Chew: Thank you, Sam. Funds from operations, or FFO, was $10.6 million or $0.18 per diluted share for the first quarter of 2023, compared to $8.5 million or $0.16 per diluted share for the prior year period, resulting in a 13% per share increase. Normalized FFO, which excludes amortization and nonrecurring items, was $11.7 million or $0.20 per diluted share for the first quarter of 2023, compared to $10.4 million or $0.19 per diluted share for 2022, resulting in a 5% per share increase. We were able to obtain these increases in FFO and normalized FFO despite our operating results being largely impacted by our investments to grow the company through value-add acquisitions and developments, inflation and rising interest rates on our short-term borrowings.

Rental and related income for the quarter was $45.3 million compared to $41.6 million a year ago, representing an increase of 9%. This increase was primarily due to recent community acquisitions, the addition of rental homes and an increase in rental rates. Community operating expenses increased 11% during the quarter. This increase was mainly due to our recent acquisitions as well as an increase in payroll, real estate taxes and insurance. Community NOI increased by 7% for the quarter from $23.5 million in 2022 to $25.2 million in 2023. Our same-property results are trending in the right direction. It is important to note that while total community operating expenses were up 11%, same property operating expenses were up 6.8% which moderated from 10.2% last year and 14.5% in the fourth quarter.

Sales of manufactured homes for the quarter increased 70% year-over-year from $4.3 million in 2022 to $7.3 million in 2023. We sold a total of 83 homes in the first quarter of 2023 as compared to 61 homes in the first quarter of 2022. There were 39 new home sales compared to 27 last year. The company’s average new home sales price was approximately $136,000 during the first quarter of 2023 as compared to $95,000 in 2022, resulting in a 43% increase. The gross profit percentage increased by 2% from 30% in 2022 to 32% for 2023. As we turn to our capital structure, at quarter end, we had approximately $751 million in debt, of which $461 million was community-level mortgage debt, $191 million with loans payable and $99 million was out 4.72% Series A bonds.

75% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 3.91% at quarter end compared to 3.78% at quarter end last year. The weighted average interest rate on our short-term borrowings is 7.39% as compared to 2.52% last year. We are exploring opportunities to raise lower-cost capital to pay down our short-term borrowings, which would result in increased earnings per share. The weighted average maturity on our mortgage debt was 5.3 years at quarter end and 5.2 years at quarter end last year. At quarter end, UMH had a total of $247 million in perpetual preferred equity. Our preferred stock, combined with an equity market capitalization of $887 million and our $751 million in debt results in a total market capitalization of approximately $1.9 billion at quarter end.

During the quarter, we issued and sold 2.1 million shares of common stock through our common ATM program at a weighted average price of $16.83 per share, generating gross proceeds of $34.8 million and net proceeds of $34.3 million after offering expenses. Subsequent to quarter end, we issued and sold approximately 688,000 shares of common stock through our common ATM program, generating gross proceeds of $10.3 million. Additionally, we issued and sold 874,000 shares of our Series D preferred stock through our preferred ATM program at a weighted average price of $22.52 per share, generating gross proceeds of $19.7 million and net proceeds after offering expenses of $19.3 million. Subsequent to quarter end, we issued and sold an additional 278,000 shares of our Series D preferred stock throughout preferred ATM program, generating gross proceeds of $6 million.

On November 7, 2022, we entered into the second amended and restated credit agreement with BMO Capital Markets and JPMorgan Chase Bank which increased our credit facility to $100 million with a maturity date of November 7, 2026. On February 24, 2023, we increased this facility to $180 million. As of quarter end, the amount outstanding under this facility was $100 million, and the interest rate was 6.59%. This new agreement enhances our liquidity and financial flexibility, allowing us to continue to execute our business plan. On March 9, we entered into a $30 million revolving line of credit with Triad Financial Services that is secured by rental homes and rental home leases. We view this as a good short-term source of capital to invest in our rental program until we are able to secure long-term capital at more advantageous rates.

We are pleased to have another line secured by our rental units. From a credit standpoint, our net debt to total market capitalization was 38.1%; our net debt of securities to total market capitalization was 36%; our net debt to adjusted EBITDA was 7.7x; our net debt less securities to adjusted EBITDA was 7.2x; our interest coverage was 2.4x; and our fixed charge coverage was 1.7x. From a liquidity standpoint, we ended the quarter with $32.9 million in cash and cash equivalents and $80 million available on our credit facility, with an additional $400 million potentially available pursuant to an accordion feature. We also had $86.3 million available on our other lines of credit for the financing of home sales and the purchase of inventory and rental homes.

Additionally, we had $39.3 million in our REIT securities portfolio unencumbered. This portfolio represents approximately 2.2% of our undepreciated assets. We are committed to not increasing our investments in this week securities portfolio and have, in fact, sold certain positions. During the quarter, we paid off 2 mortgages secured by 14 communities for a total of $45 million. Given the high interest rates, we opted not to place mortgages on these communities until interest rates stabilize. We currently have 50 free and clear communities, including the communities that are being utilized in the unencumbered asset pool our unsecured line of credit with a value of approximately $500 million. We have the ability to place long-term debt on these communities when we believe it is in the best interest of the company.

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.

Eugene Landy: Our goal is access to long-term patient capital so that UMH can provide much-needed affordable housing. An investment in UMH is an investment in providing the nation with quality affordable housing. UMH’s income was rated 100% social by MSCI. We also have a second-party opinion from Sustainalytics and other recognized ESG certifying authority, certifying the positive social impact of UMH and improving the framework for a potential sustainable debt instrument for security in the future. UMH believes in good faith and fair dealings with everyone, including our residents. We believe that limiting our rent increases while our competitors are aggressively raising rents will result in a strong tenant base and a durable income stream.

This policy should result in lower turnover, higher occupancy rates and higher sales prices and most importantly, satisfied residents. The [indiscernible] economic markets have created a challenging operating environment. UMH remains well positioned because of the strong fundamentals of our business as well as the experience garnered and instilled in our team over the past 55 years. The strong fundamentals are represented through our same property occupancy growth of 100 basis points and our sales growth of 70% during the quarter. The new home inventory we are carrying together with the capital invested for value-add communities, expansions and developments that are not accretive yet is currently negatively impacting our results, but it will allow us to grow earnings substantially throughout the remainder of the year.

Our info pace is in line with our expectations and we anticipate further improvement as we move into our peak demand season. We believe that UMH should be particularly attractive to ESG investors because of the positive societal benefits provided by our business plan as well as our ability to grow earnings over time. Long-term patient capital allows UMH to focus on providing the highest quality living our industry can provide. Short-term earnings don’t fully represent an accurate depiction of the value created by the company. Over time, this will become apparent to our earnings and valuation growth. We look forward to rewarding our shareholders for a growing dividend and stock price appreciation. Our policy is to pay distribution to shareholders and raised new capital for expansion and acquisitions.

Q&A Session

Operator: [Operator Instructions] And our first question will be from Keegan Carl from Wolfe Research.

Operator: And the next question is from Rob Stevenson from Janney.

Operator: And the next question is from Craig Kucera from B. Riley FBR.

Operator: [Operator Instructions] The next question is from Jay McCanless from Wedbush Securities.

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

Samuel Landy: 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 August with our second quarter 2023 results. Thank you.

Operator: And the conference has now concluded. Thank you for attending today’s presentation. The teleconference replay will be available in approximately 1 hour. To access this replay, please dial U.S. toll-free 1-877-344-7529 or international (412) 317-0088. The conference access code is 716-2415. Thank you, and please disconnect your lines.