UMH Properties, Inc. (NYSE:UMH) Q4 2023 Earnings Call Transcript February 29, 2024

UMH Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to UMH Properties Fourth Quarter and Year-End 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be opportunity to ask question. [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-K that we filed with the SEC yesterday, we have filed an unaudited fourth quarter and year-end supplemental information presentation. This supplemental information presentation along with our 10-K 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 fourth quarter and year-end 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. At this time in 2022, we were running out of homes to sell or rent and we were hoping that our manufacturers could shorten the backlog so that we could meet our occupancy and sales goals. At this time in 2023, we suddenly had 1,300 new homes in inventory and had to set up those homes before they could be sold or rented. Now, we are proud to report we rented or sold those homes. And obtaining homes for sale or rent has normalized, so we can again carry just-in-time inventory of approximately 400 homes. Our results for 2022 and the first half of 2023 were negatively impacted by our inventory issues. With those problems behind us, we are back in a position to generate growth in revenues from new rental homes, home sales and rent increases.

We made considerable progress executing our long-term business plan, which resulted in improved operating and financial results. We filled over 1,000 new rental homes and had a net increase in occupancy of 704 units or 210 basis points. This is the equivalent of building a 1,000-unit apartment complex in one year. Additionally, sales increased by 23%. These newly occupied rental and sales units resulted in a 9% same-property income growth and 13% same-property NOI growth. The improved operating results are generating a meaningful increase in community value, which is being realized through our financing and refinancing efforts. We are pleased to report another quarter of normalized FFO growth. Normalized FFO per share was $0.23 in the fourth quarter of 2023 as compared to $0.20 in the fourth quarter of 2022, representing an increase of 15%.

This is the third consecutive quarter of sequential FFO growth. We believe that the company is well positioned for additional FFO growth, as we continue to improve our operating results. Additionally, normalized FFO for the year was $0.86 as compared to $0.85 in the prior year. Our past work generates our current income and FFO does not fully reflect the tremendous effort we are putting into our future results. Our 2,100 acres of vacant land, 3,400 vacant lots and 400 homes in inventory are all part of our efforts to generate future income. Investing in value-add communities expansions and greenfield development requires patient capital, as these investments take three years or more to produce accretive returns. With the right time horizon, these investments significantly outperformed the acquisition of stabilized assets.

UMH is carefully balancing the investment in new projects with earnings accretion so that we can generate long-term shareholder value, while increasing short-term per share earnings. We have invested to-date approximately $27 million with our partner Nuveen, in developed and undeveloped lots that will not reach full occupancy for approximately three years. We have approximately $40 million invested in 500 vacant expansion lots that will not be fully occupied for three years. We are working on seven turnaround properties purchased in the last two years that will become accretive within the next two years. At any given time, UMH has $100 million or more invested that is not yet producing accretive returns. Our results are strong, but we continue to work to achieve even better results.

Our team did an exceptional job installing, renting and selling over 1,200 new homes this year. 1,040 of these homes are new rental homes and 164 were new home sales. Net rental, homes increased by 871 units with the difference being rental home sales and home removals at recent acquisitions. Our successful sales and rental programs generated a net increase in occupancy of 704 units, an increase of 210 basis points over last year. As we have discussed throughout the year, our financial results were impacted by the carrying costs associated with our unusually high inventory levels during the first half of the year. Moving forward, we anticipate our inventory being between 300 and 500 units as compared to 1,300 at the beginning of 2023. Manufactured backlogs have been reduced to four to eight weeks, so we believe we will be able to achieve similar if not better occupancy gains with just-in-time inventory.

Our same-property operating results, demonstrate the success of our value-added business plan. We generally acquire well-located communities in need of repair with existing vacancies. As we improve the communities and make them desirable places to live, demand for sales and rentals increases. In the fourth quarter, same-property income increased by 11% and same-property NOI increased by 19%. Same-property income for the year increased, by 9% and same-property NOI increased by 13% or $12.2 million. These increases were driven by an increase in occupancy of 632 units or 310 basis points and/or rent increases. Our occupancy gains occurred throughout the year but predominantly in the second and third quarters. Therefore the annualized run rate effect of the revenue, generated by these occupancy gains is not fully reflected on our financial results.

Our same-property revenue reported for the year was $182.9 million and $47.3 million for the fourth quarter, which annualizes to $189.2 million. Therefore our annualized fourth quarter revenue is $6.3 million higher than our actual results for the year meaning, if we had received these homes in early 2022 our year-end revenue would have been $6.3 million higher. The gains made on the occupancy and revenue fronts, position us for an even stronger 2024. Our sales operation continues to profitably sell and finance homes. Gross home sales were $31.2 million, as compared to $25.3 million last year, representing an increase of 23%. We sold 341 homes, of which 164 were new home sales, averaging $138,000 per home sale and 177 were used home sales, averaging $48,000 per home sale.

We were able to achieve a 32% gross profit as compared to a 31% last year. We are proud to announce that with our $31.2 million in sales this year, we broke our previous all-time sales record of $28.1 million and exceeded our sales goal of $30 million. We anticipate further improvements in our sales division, as the demand for affordable housing continues and the carrying costs of our inventory decrease. Our rental home portfolio continues to perform exceptionally well. We now own 10,000 rental units, of which 94% are occupied. We continue to experience 30% or less turnover per year, and our expenses are only approximately $400 per unit, per year. We anticipate adding another 800 to 900 homes next year. Backlogs from our manufacturers have returned to normal levels of four to eight weeks, allowing us to no longer have to carry large amounts of inventory.

This should help to reduce our interest expense and carrying costs, while allowing us to generate similar overall occupancy and revenue gains next year. COVID caused manufacturing backlogs that increased the cost of each home, increased the amount of inventory we carried and increased many costs associated with carrying high inventory, but that is all behind us now. We completed the construction of 216 expansion sites. These expansions are located in good markets in Maryland, Pennsylvania, Tennessee and Indiana and should generate profitable sales. Next year, we anticipate approvals to develop 800 sites, and plan on developing approximately 300 or more sites. 2023 was a quiet year on the acquisition front. We acquired one newly developed community in Georgia, through our Opportunity Zone Fund.

The spread between buyers and sellers resulted in a relatively muted transaction year in the UMH space. We anticipate that a prolonged high interest rate environment, may result in communities being available at more reasonable prices, than the past few years. We are well positioned to execute on these opportunities when they arise. We have two communities in Maryland under contract, and anticipate closing on both in 2024. We are also evaluating several other acquisition opportunities, and hope to grow our acquisition pipeline. UMH owns a portfolio of 25,800 developed homesites situated in 135 manufactured home communities, across 11 states. Additionally, we are a 40% partner with Nuveen Real Estate, which owns two communities containing 363 sites in Florida, and one community that is under construction in Pennsylvania.

We have over 3,400 vacant sites to fill, plus 2,100 vacant acres of land that can potentially be developed into an additional 8,500 home sales. We can project that our $190 million rental revenue will grow 5% due to our rent increases. That amounts to $9.5 million in new revenue. Additionally, we plan on installing and renting, 800 homes in 2024, resulting in an increase in revenue of approximately $10 million. Also every 100 new homes sold, should generate $10 million in additional gross revenue and $2 million in additional net income. We expect that in 2024, rental and sales revenue should be approximately $20 million higher than our 2023. Our accomplishments in 2023, and previous years laid the groundwork to make this possible. And now, Anna, will provide you with greater detail on our results for the quarter.

Anna Chew: Thank you, Sam. Normalized FFO, which excludes amortization and nonrecurring items was $15.4 million or $0.23 per diluted share, for the fourth quarter of 2023 compared to $11.3 million or $0.20 per diluted share for 2022, resulting in a 15% per share increase. Sequentially, normalized FFO increased from $0.22 for the third quarter to $0.23 in the fourth quarter, resulting in a 4.5% per share increase. For the full year 2023, normalized FFO was $54.5 million or $0.86 per diluted share compared to $46.8 million or $0.85 per diluted share for 2022. We were able to obtain this increase in 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 $49.2 million compared to $43.7 million a year ago, representing an increase of 13%. For the full year, rental and related income, increased from $170.4 million in 2022 to $189.7 million in 2023, an increase of 11%. This increase was primarily due to recent community acquisitions, the addition of rental homes and an increase in rental rates. Community operating expenses increased 5% during the quarter and 8% for the year. This increase was mainly due to our recent acquisitions as well as an increase in payroll, rental home expenses, real estate taxes, insurance, waste removal, water and sewer expenses. Despite the increase in community operating expenses, community NOI increased by 18% for the quarter from $24.3 million in 2022 to $28.7 million in 2023, an increased by 14% for the full year from $94.8 million in 2022 to $108.4 million in 2023.

Our same-property results continue to meet our expectations. Same-property income increased by 11% for the quarter and 9% for the year generating same-property NOI growth of 19% for the quarter and 13% for the year. As we turn to our capital structure, at year-end, we had approximately $690 million in debt, of which $497 million was community level mortgage debt, $93 million was loans payable and $100 million was our 4.72% Series A bonds. 90% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 4.17% at year-end compared to 3.93% at year-end last year. The weighted average maturity on our mortgage debt was 5.3 years at year-end and 5.1 years at year-end last year. The weighted average interest rates on our short-term borrowings, was 6.98% as compared to 6.76% last year.

In total, the weighted average interest rate on our total debt was 4.63% at year-end compared to 4.60% at year-end last year. We completed the addition to our Fannie Mae credit facility of a pool of eight communities totaling 1,280 sites for total proceeds of approximately $58 million. The addition is interest-only at a fixed rate of 5.97%. These communities were acquired in 2012 and 2013. Our total investment in these communities, including capital improvements, is $52.2 million or approximately $41,000 per site. The community is appraised for approximately $108 million or $84,000 per site, reflecting an increase in value of $55.9 million or 107%. We utilize this capital to pay down our short-term borrowings, which resulted in increased earnings.

At year-end, UMH had a total of $290 million in perpetual preferred equity. Our preferred stock, combined with an equity market capitalization of over $1 billion and our $690 million in debt results in a total market capitalization of approximately $2 billion at year-end as compared to $1.9 billion last year, generating an increase of 6%. During the year, we issued and sold 9.4 million shares of common stock through our common ATM programs generating net proceeds of approximately $145.8 million. The company also received $9 million including dividends reinvested through the DRIP. In addition we issued and sold 2.6 million shares of our Series D preferred stock during 2023 through the preferred ATM programs generating net proceeds of approximately $55.7 million.

Subsequent to year-end we issued 1.2 million shares of common stock through our common ATM program generating net proceeds of approximately $18.9 million. In addition we issued 121,000 shares of our Series D preferred stock through our ATM program, generating net proceeds of approximately $2.7 million. From a credit standpoint, we ended the year with net debt to total market capitalization of 31.3% net debt less securities to total market capitalization of 29.6%, net debt to adjusted EBITDA of 6.2 times, and net debt less securities to adjusted EBITDA of 5.9 times. Interest coverage was 2.7 times and fixed charge coverage was 1.9 times. From a liquidity standpoint, we ended the year with $57.3 million in cash and cash equivalents and $110 million available on our unsecured revolving credit facility with an additional $400 million potentially available pursuant to an accordion feature.

We also had $198.5 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 $34.5 million in our REIT securities portfolio all of which is unencumbered. The portfolio represents only approximately 1.9% of our undepreciated assets. We are committed to not increasing our investments in our REIT securities portfolio and have in fact continued to sell certain positions. We are well-positioned to continue to grow the company internally and externally. And now let me turn it over to Gene before we open it up for questions.

Eugene Landy: UMH begins 2024 by reflecting on everything we accomplished in 2023 and setting our goals higher for 2024. We are proud that we installed and rented or sold over 1200 homes in 2023. These new homes generated a 230 basis point increase in same-property occupancy a 23% increase in gross sales of manufactured homes and a 13% increase in same-property NOI. The occupancy and revenue gains position UMH to outperform the market in 2024. We plan on installing and renting 800 to 900 new homes achieving our 5% rent increases growing our gross sales and our sales margins. We also intend to be active in the acquisition market assuming attractive asset pricing and to develop 300 or more expansion sites. These items will help us to generate additional occupancy and revenue gains thereby increasing earnings and property values.

We have a mission to provide the nation with high-quality affordable housing. We have made strides in executing this mission through the acquisition and rehabilitation of older communities, the development of expansion sites, and new communities and our financing of home sales. We have the best quality affordable housing at a price point that can't be matched. The affordable housing crisis is only going to intensify from single-family homebuilders pulling back resulting in fewer housing starts, mass migration to the United States, and the obsolescence of the existing housing stock. Our new manufactured homes sell for as little as $90,000 and rent for as low as $1,000 per month. These are prices that are unmatched by any quality competition in the market.

Families with a household income of $40000 can afford to either buy or rent a home in a UMH-managed community. UMH operates our communities with a long-term business plan. We complete the necessary improvements, which results in a high-quality community with happy tenants. We treat our tenants fairly by limiting their rent increases to 5%, 6%, even though we may be able to achieve larger rent increases. These policies generate good relationships with our tenants, which results in lower turnover and turnover-related expenses. UMH had a solid year on the financial and operating fronts. We believe that we have positioned the company to outperform in the coming years. As site and home rental income should continue to grow through our rent increases and improvements in occupancy, we should continue to increase the profitability of our sales operation.

We intend to acquire communities as they become available and develop new expansion sites in new communities. Our business plan has positioned the company with 3,400 vacant sites and 2,100 acres of vacant land that can be developed into additional sites. Our vacant sites and land holdings have significant potential. As we fill the existing vacant sites and build more sites on our vacant land, these values can be realized. We are pleased with the progress to date and look forward to furthering our mission and accomplishing our goals again in 2024. Congratulations to all our staff who have executed so well on our mission statement to provide quality affordable housing for the nation.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Rob Stevenson of Janney. Please go ahead.

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