Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

UMH Properties, Inc. (NYSE:UMH)

Q1 2014 Results Earnings Conference Call

May 09, 2014, 10:00 AM ET

Executives

Susan Jordan - Director, Investor Relations

Samuel A. Landy - President and CEO

Anna T. Chew - CFO and VP

Eugene W. Landy - Chairman

Analysts

Stephen B. Guy. - Robert W. Baird

Brian Hollenden - Sidoti & Company

Craig Kucera - Wunderlich Securities

Joseph Valdrini - Bank of America Merrill Lynch

Richard Murray - Midwest Advisors

Operator

Good morning, and welcome to the UMH Properties Inc. First Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). Please note this event is being recorded.

It is now my pleasure to introduce your host, Ms. Susan Jordan, Director of Investor Relations. Thank you, Ms. Jordan, you may begin.

Susan Jordan

Thank you very much, operator.

I would like to remind everyone that certain statements made during this conference call, which are not historical facts maybe 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 risk and uncertainties that could cause actual results to differ materially from expectations are detailed in the company's first quarter 2014 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements.

Having said that I’d like to introduce management with us today, Eugene Landy, Chairman; Samuel Landy, President and Chief Executive Officer; and Anna Chew, Chief Financial Officer. It is now my pleasure to turn the call over to UMH’s President and Chief Executive Officer, Samuel Landy.

Samuel A. Landy

Thank you very much, Susan. Good morning, everyone and thank you for joining us. We are pleased to report our results for the first quarter ended March 31, 2014. UMH has continued to execute our growth strategy of purchasing well located communities in our target markets including the energy rich Marcellus and Utica Shale regions. We have increased the number of our developed home sites by 16% over the prior year period.

In March 2014 we acquired eight manufactured home communities for $24,950,000. These eight all-age communities totaled 1,018 sites and are situated on approximately 270 acres and are all located in the Marcellus and Utica Shale regions of Ohio. The average occupancy for these communities at closing was approximately 70%. We assumed mortgages totaling approximately $18.1 million and used our credit facility to finance the remaining cost of this acquisition.

Additionally over the past four years we have more than doubled our portfolio by acquiring 54 communities totaling 7,700 developed home sites. Our portfolio is now comprised of 82 communities with 14,500 developed home sites in seven states.

UMH has continued to expand our acquisition pipeline and has entered into definitive agreements to purchase six manufactured home communities with the total of approximately 589 developed home sites. These communities are located in Ohio and Pennsylvania. The aggregate purchase price of these communities totals approximately $17.6 million. In conjunction with the purchase of these communities we will assume mortgages totaling approximately $8.6 million. We anticipate closing these transactions during the third quarter of 2014. We have positioned ourselves for future growth and we'll continue to seek opportunistic investments.

Income from community operations increased to $6.6 million for the first quarter of 2014 as compared to $5.7 million for the same period in 2013. Overall occupancy has remained relatively stable at 81%. Same store occupancy has increased from 80.8% in the first quarter of 2013 to 81.8% currently. With charter mortgages for home owners remaining scarce we continue to see increased demand for rental units. After adding approximately 300 rental units to selected communities in 2013 as well as acquiring 300 rental units with fiscal 2013 community acquisitions we have added an additional 110 rentals in the first quarter of 2014. We intend to add more rental units throughout 2014 as demand dictates. Occupied rental units represent approximately 15% of total occupied sites at quarter-end. Occupancy in rental units continues to be strong and it's currently at 91% occupancy.

We intend to convert current renters to new home owners in the future. Our sales of manufactured homes for the quarter were disappointing going from $1.8 million in the first quarter of 2013 to $1 million in the first quarter of 2014. The severe winter weather experienced by the Northeast hampered home sales. January and February industry shipments for the states in which we operate were also down for the quarter by approximately 24%. We anticipate that second quarter sales will show an improvement as purchases delayed by bad weather proceed.

We have taken a number of steps to increase home sales, occupancy and profitability including a broad marketing campaign and the opening up an additional two regional sales centers that will sell homes both inside and outside of our communities. We have also partnered with 21st Mortgage Corporation to finance home purchases. Although we had a slow start in this first quarter we believe that this partnership has the potential of increasing home sales.

UMH's core funds from operations for the first quarter were $0.11 per share. Although this is an improvement from $0.05 in the fourth quarter of 2013 it still falls short of the amount needed to cover our $0.18 per share quarterly dividend. Increased occupancy and improved sales should improve our operating results significantly. UMH remains positive as to the future prospects of affordable housing and manufactured home.

Traditional site built home prices have risen more than 20% over the past two years which may render these homes beyond the reach of many potential home owners. Baby boomers seeking retirement will also add to the need for local housing alternatives. For this reason we will recommend to maintain the continuation of our current dividend to our Board of Directors at the next quarterly meeting notwithstanding the current shortfall.

And now Anna will provide you greater detail on our results for the quarter.

Anna T. Chew

Thank you Sam. Core funds from operations or core FFO were $2.4 million or $0.11 per diluted share for the first quarter of 2014 compared to $5.3 million or $30 per diluted share for the first quarter of 2013 and $1.1 million or $0.05 per diluted share for the fourth quarter of 2013. Core FFO excluding securities gains was $1.9 million or $0.09 per diluted share for the recent quarter compared to $1.9 million or $0.11 per diluted share a year ago and $825,000 or $0.04 for the fourth quarter of 2013. Rental and related income for the quarter were $14.8 million compared to $11.6 million a year ago, an increase of 28%, primarily due to the acquisition of 15 communities since the prior period.

Our community operating expenses for the quarter were $8.3 million compared to $5.9 million a year ago representing an increase of 41%. Community operating expenses including repairs and maintenance and utility expenses were higher than anticipated due to the harsh winter weather. Income from community operations amounted to $6.6 million for the quarter compared to $5.7 million a year ago representing a 16% increase.

Our sales have decreased from the prior year period from $1.8 million to $1 million in the first quarter of 2014. Our loss from the sales operations including interest expenses increased from $346,000 for the first quarter of 2013 to $582,000 for the first quarter of this year. This loss does not take into consideration allocation of corporate overheads. As Sam has stated we intend to bring sales back to profitability.

As of quarter end our capital structure consisted of approximately $231 million in debt, of which $178 million was community level mortgage debt and $54 million were loans payable. 95.4% of our mortgage debt is fixed rate. The weighted average interest rates on our mortgage debt is 4.8% and the weighted average maturity is 5.9 years. We also had a total of $92 million in perpetual preferred equity at quarter-end. Our preferred stock combined with an equity market capitalization of $212 million and our $231 million in debt gives us a total market capitalization of approximately $535 million at quarter end.

From a credit standpoint our net debt-to-total market capitalization was 42%. Our fixed charge coverage was 1.5 times and our total debt-to-EBITDA was nine times. From a liquidity standpoint we ended the quarter with $7.8 million in cash and cash equivalents and $5 million in availability under our credit facility with an additional $15 million potentially available pursuant to an accordion feature.

During the quarter we drew down an additional $10 million to fund our eight community acquisitions. We also had $7.9 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $60.7 million in marketable REIT securities encumbered by $13.1 million in margin loans at 2% interest. Generally 50% maybe borrowed on margin. At the end of the quarter we had $4.4 million in net unrealized gains on our securities investments in addition to the $508,000 in total gains realized thus far in 2014.

And now we will be happy to take your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). And our first question will come from Steven Guy of Robert W. Baird.

Stephen B. Guy. - Robert W. Baird

Hi, good morning everyone.

Anna T. Chew

Good morning.

Samuel A. Landy

Hi.

Stephen B. Guy. - Robert W. Baird

I was just wondering if you could quantify the impacted of the winter-rated cost in OpEx for the quarter. And then also if there any one time costs related to the first quarter acquisitions in that OpEx figure I know in past quarter there's been one-time you know random expenses associated with OpEx. So if you could just clarify those items?

Samuel A. Landy

I'll let Anna be specific about that but this is Sam Landy here. I wanted to tell you know that communities that are 90% occupied should run on expenses between 30% and 50%. If community has separately metered utilities spend you might get the expenses down to 30% of revenue. If the utilities aren't separately metered expenses might be 50% of revenue. As we are making these acquisitions there is a lot of a clean-up involved in removing old homes, upgrading the communities, building sales centers, you have your additional winter expenses.

I'll let Anna be specific with that. But ultimately separately metered utilities that you are looking to be expenses ratios at 30%-40% and if we are directly paying the utilities about 50%, that's where we expect to be over time with communities we have acquired and communities we own. But go ahead Anna.

Anna T. Chew

Sure, I mean in total I shouldn't say in total we believe that's it approximately $200,000 to $300,000 just with specific expenses regarding the dumpsters and the home beat and the home demos. But however, that doesn't include the extra people that we have to employee while getting the new communities back to the 90%, 95% occupancy that we wish to have and to upgrade those communities.

Stephen B. Guy. - Robert W. Baird

Okay. So the $200K to $300K was specifically related to the acquisitions in 1Q.

Anna T. Chew

In 1Q right.

Stephen B. Guy. - Robert W. Baird

Okay. That's helpful. And then it seems like the rental program is going well but I feel like there is still some disconnect in translating that rental occupancy into owner occupancy. Do you believe there is maybe a structural phenomenon in your markets where consumers have a greater propensity to rent?

Eugene W. Landy

This is Eugene Landy. Yes that's happening industry wide. I was very reluctant to go into the rental program and we lagged behind our competitors in introducing rentals. But now I see quite clearly that there is a change in the demographics that the young people want to rent and that the housing market, which used to be over 65% home ownership and 35% rentals is changing, so that you're now seeing nationwide a move towards rentals that has helped apartment market, and of course it's now helping us. The fundamentals of our business right now is that rentals are quite strong. This is a projection that with 91% occupied rentals and as fast as we bring them in we can rent them as the shift towards the rentals continues.

So the basic business is sound, but the sales aspect of it has been very disappointing and we think that over the last few weeks since beginning the turn, but you can tell we now that sales are picking up but we don't know whether this is just seasonal or whether we finally see the turn in the industry. The industry has gone from 250,000 to 300,000 units a year all the way down to 50,000 and as we covered the 50,000, in fact we cover is the wrong word to 62,000.

This is no recovery at all. This industry should sell a 150,000 homes a year and it's been our firm prediction that this will ultimately happen because we have a great product. The home is affordable, it's at the right price and we are waiting for a return to the basics of the industry. And that will solve the occupancy problem.

Traditionally over 30-40 years manufactured home communities were full, absolutely full, the industry's problem was we couldn't build enough communities to satisfy the demand. And now over the past five, six, seven years we've had a situation where occupancy continued to fall down to the point where I think we're about 80% occupancy and we think 96%, 97% should be the proper figure.

So the basics of the company are that right now we generating over $60 million a year in land. Our expenses which should be running below $30 million are running somewhat over $30 million and we're aware of that problem. If we can get to good occupancy, full occupancy we'll be up to $75 million gross income and then if we keep the expenses in line it will be about $37 million. So we will pick up about $8 million as we go to full occupancy. And we still expect that to happen.

We're still buying communities at attractive prices, and we think the fundamentals are rentals are really sound, and the problem that you see right now for expenses being higher than revenues part of that is that we have taxes, healthcare costs quite a few growing up, and we haven't been raising rents commensurate with the increase in cost. But again if the market changes which everybody anticipates, not just our industry but everybody in housing that demand will exceed supply and the pricing will rise accordingly.

Samuel A. Landy

If I can just touch on that a little bit, one of the biggest issues in manufactured home sales has been the financing issue, both obtaining the financing for a customer and across the financing that this financing costs more than conventional home mortgages. I saw a paragraph in a letter from Warren Buffet to Kevin Clayton. And Warren Buffet was saying to Kevin Clayton if he could solve the problem on the losses of repossession, this business is a no brainer, the interest rates will fall and the financing will be easier.

In January 1, we entered an agreement into an agreement with 21st Mortgage where they originate the loans and we guarantee them. With this type of a program the lender 21st really has almost no chance of losing money. And as we develop a history of this it could be that there is more approvals of loans and lower interest rates, and those are the things that's going to take to really get manufactured home shipments throughout the country from the anemic 60,000 backup which is a 200,000-300,000 range, and we see that coming at some point.

Samuel A. Landy

Great thanks. And just in terms of the acquisition pipeline, can you just talk a little bit about your plans on funding those $17.6 million in acquisitions?

Eugene W. Landy

We have absolutely no problem in funding. We've recently returned from the MHI Conference. And we met with the -- what was the -- a number of organizations so that with a government.

Anna T. Chew

Freddie Mac program.

Eugene W. Landy

Freddie Mac program. Our bank relationship are excellent, the regional banks want our product. You're dealing with a company that has close to 15,000 sites, and the so we have $500 million-600 million in assets and Anna what's our total debt?

Anna T. Chew

Only about 200 and 220-230.

Eugene W. Landy

$220 million and I take $50 million off of that because we have liquid securities. So we have very low leverage manufactured housing REIT and the financing is not our problem, our problem is sales right now.

Anna T. Chew

And to be specific on the $17.6 million in acquisitions, we will assuming be 8.6 in mortgages and we only need approximately $9 million to close those deals, and we have that availability.

Stephen B. Guy. - Robert W. Baird

Okay great thanks. That's all from me.

Anna T. Chew

Thank you Steven.

Operator

And the next question is from Brian Hollenden of Sidoti.

Brian Hollenden - Sidoti & Company

Good morning guys, thanks for taking my call.

Anna T. Chew

Good morning Brian.

Brian Hollenden - Sidoti & Company

You have about 23,000 vacant home sites. Is that correct?

Samuel A. Landy

Yes.

Brian Hollenden - Sidoti & Company

My question is what is the right balance between purchasing additional properties compared to waiting until those vacant lots start to sell off. How do you sort of gauge that?

Samuel A. Landy

Everything is based on location. UMH owns 30 communities with occupancy over 90%. So the places that you see the vacancies in the existing portfolio, it's generally caused by the economics of those areas, Western Ohio, Pennsylvania, places where the coal mining jobs and field jobs were lost. And we're acquiring in those areas based on the belief that the Marcellus shale workers and the growing economies will result in these community which were once 90% to 100% occupied but lost their occupancy. We're buying them betting we can fill these sites.

To not do acquisitions because we think we can fill those sites would be a big mistake. I mean we're doing acquisitions because in good markets communities have over 90% occupancy. UMH has been doing this since 1996. There was a point in 2006 where we couldn't find acquisition they were just too expensive. And we were trying to expand by building extensions or even trying to build communities. We've learned that approved -- expanding by expansions or taking vacant land and building it into communities is virtually impossible. The approval process is just so horrible so time consuming so uncertain and your expenses are so uncertain that it's just way to difficult.

Acquiring communities even with vacancies like the portfolio we're working on now with 70% occupancy, it's a fantastic thing to do because we're buying at lower than replacement cost. We're looking at the demographics of the area we're making the purchases. And we believe that we are going to increase the occupancy. Now I tell everybody the first step is backward because the prior owners of these communities left them anticipating higher rents increased occupancy and when those things didn't materialize they stopped doing maintenance, stopped making capital improvements, stop evicting people who should have been evicted.

The only declines in occupancy that UMH has currently seen in its portfolio are the communities we've recently acquired, and that's because we need to enforce the rules and regulations and do the evictions in those communities. We need to upgrade the communities. So when we make our acquisitions we may in fact reduce occupancy the first six months. But then we've received tremendous favorable feedback from municipalities, potential customers and existing customers as we upgrade them, market them, enforce the rules and regulations, provide proper management the occupancy just starts increasing and plus we have the ability to do with this rental units, we anticipate adding between 300 to 400 rental units per year.

Rental units only cost us about $40,000 fully set up and we expect to earn 20% on the rental unit during the year. So we should in my opinion we should absolutely continue to make acquisitions despite the vacant sites and we should continue to work on filling those vacant sites through both sales and rentals.

Eugene W. Landy

Yes. I'm just going to repeat what Sam said, it is so important. If we can buy a site of 30,000-35,000 even 40,000 units that's well located and if we can put a 40,000 double wide with three bedroom and two baths we create a housing unit at 70,000-75,000. Our competitors in the private REIT sector are building units not even three bedroom, two bedroom units the 220,00 a unit. So we're highly competitive rental units. We think the right thing for us to do is to continue to buy the communities and to the extent we can find them and we are concentrating on the Eastern Ohio and Pennsylvania because of the Marcellus and Utica shale, but we think the overall housing market is going to be good nationwide but we think that segment will be particularly good. So we are continuing to buy communities as they become available.

Brian Hollenden - Sidoti & Company

Okay, thanks for that. And then just one quick follow-up, you had touched on. Could you talk a little bit you know I guess more specifically the rental segment is going very well. How do you exactly go about converting renters to owners? Is that purely getting then financing or there are some other key elements there?

Samuel A. Landy

One of things is a lot of people have never experienced living in a manufactured home committee and so they have a degree of not knowing what it's going to be. And the rental units allows them to come in there with no commitment see what it's like in the community and from there they can purchase the house they live in or purchase another house. We have what's called a lease with an option to purchase which results in sales. You have -- what happens is you rent the house to one person and their various family members wind up buying the houses.

There is a lot of people who, you know, really want to convert rentals to sales and it's something we want to do and can do overtime. You know when you are collecting $8,000 per year on a rental unit in five years you have a 100% of your money back and you could sell that house for almost anything and still be okay. But I personally like rental units an awful lot. You can raise the rent each year, you can monitor how the resident's taking the care of the house, the quality of the residence.

When we first started doing rental units the reason I vouched for it, if I drive through a community I really can't tell the difference between a resident owned home and a rental unit and homes have improved so much the benefits of putting in a brand new house in a community whether it's a rental or resident occupied house, it creates substantial aesthetic value for people driving through the community. So yes we want to sale homes, the primarily reason we want to sell the rental unit is so I can purchase additional rental units. It's a good way to fund the purchase of additional rental unit but I don't believe that sale of rental units is an important part of our business plan.

We just could continue to rent those houses out. If there are 15 years I'd recommend you sell the houses because it's so much easier to care for a newer rental unit than older unit. So I prefer rental units of less than 15 years old and you work on selling them as they hit that point. But I don't see any real need to convert renters to owners because we are able to import the rules and regulations and make sure that you know rental occupancy does not degrade the community.

Brian Hollenden - Sidoti & Company

Thanks, guys.

Operator

And next we have a question from Craig Kucera of Wunderlich.

Craig Kucera - Wunderlich Securities

Yeah, hi. Good morning. I may have missed this earlier but I know and you noticed it you mentioned the weather impacted sales and traffic, and can you give us any additional color maybe how traffic has changed since things have sort of warmed up in your markets here as we are sort of in the middle of the second quarter?

Samuel A. Landy

Sure, there were a couple of issues that affected sales for January, February and March. One of which was of course the weather which was horrendous. A second issue was going to the 21st Mortgage program, exchanged the paperwork on our lending which just require more time for our various sales people to learn how to do the paperwork and to learn how to properly handle the process which also delayed things.

So those two things combined and additionally manufactured housing lost its distribution network when sales fell from $200,000 units to $60,000 units and when we lost our distribution network we lost our marketing and it's a really big problem because I believe that our product is so much better than apartments and town houses and for people on where their housing choice is based strictly on their income, we are better for those people than a conventional house on land. But we have to give that message out. They don't know that. They are living in an apartment and they don't know that we can provide a lower cost alternative without common wall neighbors, without somebody living above, that we can provide a place where they can have a garden and a yard for their children.

And that we just have a better house and a better price and there is nobody getting that message out. Normally there would be five dealers near any community and plenty of people would be on radio, television, newspaper and plenty of people would be thinking of us, but the past decade manufactured housing retailers have been decimated they are gone and there is lack of marketing.

So at this moment, UMH is engaging in a build board campaign throughout Pennsylvania and we are increasing our newspaper and Internet marketing, and you could see our rental units the demand is strongest and we are doing very well there. I think that we have to market towards the people who should be home buyers to increase home sales and we are working on that at this moment. The weather, the time involved in learning how to do the 21st Mortgage paperwork which is going to be beneficial and fine tuning our marketing all impacted sales January, February and March but April was -- there is no reason to believe it's anything great, but May is looking pretty good, May is looking pretty good.

Eugene W. Landy

I would just add to that, the 21st essentially is a great company, it's one of Warren Buffet's companies, it's very well run. The paperwork Sam is talking about is really caused by the government. The government has implemented programs requiring a lot of documentation, it's just became effective January 15 and of course 21st Century, 21st…

Samuel A. Landy

Mortgage.

Eugene W. Landy

Mortgage is required to get this documentation and it's really held up our sales.

Craig Kucera - Wunderlich Securities

Got it, okay. And so there was a bit of a pickup in your selling expenses this quarter. And again you made a comment about this earlier, but was that related to 21st Mortgage or is that something else?

Samuel A. Landy

Now it wouldn't be related to 21st Mortgage, it would be related to we are opening sales centers, we are taking the communities we acquired and we are putting in inventory, putting in marketing more people to sell homes, different signage, all those things cost money and they are all investments in future sales.

Craig Kucera - Wunderlich Securities

So does that mean when I think about, there is a lot of people and that's probably more of a recurring expense, sort of in the $700,000 range?

Samuel A. Landy

Without going to the specific number, it is recurring expense but looking at -- here's how I see it, in 2006 we sold about $17 million worth of houses and made $2 million and we did that primarily through expansions in good location. So we know -- we've been purchasing the land in front of communities and opening sales centers in what should be good locations. Currently they are operating at losses. A successful expansion or a successful sales center sales four homes per month and makes about gross profit $60,000 per month.

We currently have none of them, none of our expansion, none of our sales centers are doing that. But that’s what we project them to do for us to declare them successful and we own 84 communities today, we did 16 plus million in sales when we were less than half our size and we believe we are part of the housing market and part of the housing business. We have a lot of people who seek to by homes in our 55 and other expansions but they can't sell their current house to make the move, they sell a house for $300,000 and buy a house for $100,000 cash but they need to sell their home.

So we are making the decision let's invest in these sales center, let's build them now let's get the right people get the right marketing and unfortunately January, February and March were absolutely terrible and so you have all the expenses with none of the income but I have every reason to believe we are going to generate the income.

Craig Kucera - Wunderlich Securities

Okay, thanks for the color.

Operator

And our next question comes from Joseph Valdrini of Merrill lynch.

Joseph Valdrini - Bank of America Merrill Lynch

Good morning.

Samuel A. Landy

Hi.

Joseph Valdrini - Bank of America Merrill Lynch

Just had a quick question about the shares outstanding I can see year-over-year you got about 400 million more shares outstanding. Can you pull that down to me how much of that is dividend reinvestments and other factors?

Eugene W. Landy

Most of that is. We have been raising $25 million-$30 million in a year in the dividend rate investments share with our investment plan and that's given us the equity base to support our lines of credit and put us in position that we have -- are a good credit and has enabled us to go from 6,000-7,000 units to 15,000 units today. So that's how we have raised capital over the last five years.

Samuel A. Landy

One of the most important things since you mentioned it is our capital structure. You know what we have done is we issued the 100 million in preferred stock and borrowed to make these acquisitions and what you wind up with is a portfolio of about $600 million in properties that if the value increases 4% just from appreciation or inflation that's $24 million on a base of just 20 million shares. So the earnings and the income that we can get from appreciation exceeds anything that we are talking about of how we can reduce expenses, increase sales increase revenue.

The real beauty to this company is the fact is there is 20 million share and you know people count different ways, you can say 500 million in assets, you could say 600 million in assets. But with all of those assets and 20 million shares if we are able to increase the value through good operations or just increase the value through inflation or just increase the value because you know nationally property values go up, that appreciation will be significant to our shareholders.

Eugene W. Landy

I put that a different way. In that there's so much concentration on FFO, or FFO per share and the basis of real estate is that is you have two aspects, current income and appreciation and so they call that total return and Sam and I are very optimistic about what the total return will be on this portfolio of manufactured home communities.

Joseph Valdrini - Bank of America Merrill Lynch

Great, thank you.

Operator

And the next question…. I am sorry did…

Joseph Valdrini - Bank of America Merrill Lynch

That was just to say I have no other questions.

Operator

Okay. And our next question is from Rick Murray of Midwest Advisors.

Richard Murray - Midwest Advisors

Hey, good morning everyone. Just that we touched on it out, I wanted to ask a question about the capital structure, and help me understand the rationale for holding a securities portfolio that yields about 6.5% against paying a preferred security that costs you about 8.25?

Eugene W. Landy

Well, again it's two separate things the way we view it. We view the preferred stock and we knew what we were doing, we pay a -- in fact we joked about that, we paid 8.25% on a -- was it 91 million?

Anna T. Chew

91 million.

Eugene W. Landy

91 million in preferred and went out and bought properties at 7.5 say but actually that's you know apples and oranges. We use the preferred equity as the equity to help us put together a tremendous expansion program that has worked and so we are very proud of issuing the preferred stock.

Owing on the other side and the other side of the thing, owning a portfolio of $60 million in preferred stocks and common stocks that we own and it's good that you separate the two, people often look at the securities portfolio and lump them together. The common stock portfolio is the equivalent of owing real estate, the preferred stock is a separate element and it provides us with a very high return and it provides us with liquidity. So we are very proud of the capital structure that we have $60 million in securities with only $12 million borrowed, it's been a very successful program for so many years. We wonder why people still question it because we made a lot of money doing this. And we continue to make money keeping the preferred and common stock portfolio.

Again it's the main purpose of its liquidity. It's great that we have the bank lines. It's great that REITs have access to the capital markets. But on our own basis we have liquidity and a strong balance sheet. And that enables us to be aggressive in buying communities. When we made these acquisitions I think the biggest one was $69 million and the seller said to us could you handle it and we said no problem at all. And that helps us gets the deal, it helps us make the deal and complete it. And so we keep this liquidity and it doesn't really cost us any money. And we recommended it to all REITs that, that they keep about 10% of their gross assets in liquid REIT securities.

Richard Murray - Midwest Advisors

I appreciate your points on liquidity and they are very good ones. But I would argue that the presence of a substantial negative arbitrage on your balance sheet particularly in light of where the dividend is makes some investors somewhat uncomfortable. And given the current financing environment it seems that there are better ways to optimize the current capital structure.

Eugene W. Landy

I'm not sure I follow that. We have a -- so we have $30 million-$35 million in preferred. And you sell preferred and you pay it off the 8.25 preferred that we owned, and you pickup what $700,000 in earnings. And then what do you do. You -- right now if somebody wants me to write a check for $10 million, $15 million, $20 million, I just write a check for $10 million, $15 million, $20 million. Having shrunk the balance sheet to pick-up $700,000 in earnings you certainly make a good point that that's a plus. But the reverse of that you've gotten rid of a huge liquidity and not at the present time.

Also remember we may do this by the way as we grow the company if we can get an unsecured bank lines if we can get to be an investment grade even without being investment grade, the market for long term manufactured housing communities is so good that we may very well borrow $100 million at 4.5% and call the preferred. But the two things are completely, that's a capital decisions we will go at but simply saying that we should sell the preferred to because it's a differential in premiums is only one factor. The other factor that are important.

Richard Murray - Midwest Advisors

I appreciate that but I think if you look at over the longer term I mean I would argue you do have liquidity in the do it and reinvestment program. You have a public liquid security that you can issue into the market or to sellers of assets. But if you end up with having to cut your dividend those choices are gone become more difficult in the future.

Eugene W. Landy

Okay, we see your point and but these are things we do consider very carefully.

Richard Murray - Midwest Advisors

Thank you.

Operator

I'm showing no further questions. We will conclude the question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

Samuel A. Landy

Thank you, operator. I would like to thank the participants on this call for their continued support and the 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 second quarter.

Operator

The conference is 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 US toll-free 1877-344-7529 or international 1412-317-0088. The conference ID number is 10042566. Thank you and please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: UMH Properties' (UMH) CEO Samuel Landy on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts