UMH's (UMH) CEO Samuel Landy On Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: UMH Properties, (UMH)

UMH Properties Inc. (NYSE:UMH)

Q2 2014 Results Earnings Conference Call

August 8, 2014 10:00 AM ET

Executives

Susan Jordan - Director, Investor Relations

Eugene Landy - Chairman

Samuel Landy - President and CEO

Anna Chew - Chief Financial Officer

Analysts

Brian Hollenden - Sidoti

Craig Kucera - Wunderlich Securities

Stephen Dye - Robert W. Baird

Mike Boulegeris - Boulegeris Investments

David Minkoff - DCM Asset Management

Operator

Good morning. And welcome to the UMH Properties Inc. Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (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. Our 10-Q that we filed with the SEC yesterday is available on the company’s website at ir.umh.com. 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 second 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 Landy

Thank you very much, Susan. Good morning, everyone, and thank you for joining us. We are pleased to report our results for the second quarter ended June 30, 2014. UMH continued to execute its 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 homesites by 13% over the prior year period. Subsequent to quarter end, we purchased an additional six manufactured home communities, located in Pennsylvania and Ohio for an aggregate cost of $17.6 million or $30,000 per site, which is well below replacement cost. These all-age communities totaled approximately 600 developed homesites situated on 278 acres. The weighted average occupancy for these communities is 87%.

Additionally, over the past four years, we have more than doubled our portfolio by acquiring 60 communities totaling 8,300 developed homesites. Our portfolio is now comprised of 88 communities with 15,100 developed homesites in seven states.

We continue to seek acquisitions in our target market areas and currently have a definitive agreement to purchase one manufactured home community in Pennsylvania, with a total of 141 developed homesites for approximately $4.2 million. This transaction is anticipated to close during the third quarter of 2014. We are currently in various stages of negotiations for additional acquisitions.

Income from community operations increased to $7.4 million for the second quarter of 2014, as compared to $6.8 million for the same period in 2013.

Overall occupancy has increased 40 basis points from 81.3% at year end 2013 to 81.7% currently. Current overall occupancy reflects 2014 acquisitions of approximately 1,000 sites with a weighted average occupancy of 71.1%. Same-store occupancy has increased by 130 basis points from 81.3% in the second quarter of 2013 to 82.6% currently.

With channel loans for homeowners remaining still, we continue to see increased demand for rental units. In 2013, we added approximately 300 rental units to selected communities and acquired 300 rental units as part of our 2013 community acquisition. During the first half of 2014, we have added an additional 210 rental units. At quarter end, we had 1,975 total rental units.

Occupancy in rental units continues to be strong and is currently at 92.6%. Occupied rental units now represent approximately 15.7% of total occupied sites, because occupancy increases have been driven by home rentals, we will continue to add more rental units as demand dictates. It is our intention to ultimately convert current renters into homeowners in the future.

Our sales of manufactured homes for the quarter increased slightly from $2.3 million in the second quarter of 2013 to $2.4 million in the second quarter of 2014. Although, overall, shipments of manufactured homes were up 5.2% nationally, this growth can be attributed to just a few states and manufactured homes shipments were down 8.7% in the states where we operate.

The pace of the housing market recovery has slowed, seasonally adjusted home prices fell 0.3% in May from the prior month, housing starts dropped 9.3% in June from the prior month. However, the multifamily rental market continues to fuel the housing sector recovery and is experiencing similar increased demand as we are seeing in our Home Rental program.

UMH's core funds from operation have continued to increase from $0.05 in the fourth quarter of 2013 to $0.11 in the first quarter of 2014 and now to $0.15 for the current quarter.

While this amount still fall short of our $0.18 per share quarterly dividend, we are encouraged by the recent growth in our per share earnings, increased occupancy and improved sales should further improve our operating results significantly.

UMH remains positive as to the future prospects of housing, affordable housing and manufactured homes. The U.S. must build 1.5 million new housing units a year to keep up with the growing population and older homes falling into disrepair. The nation has not consistently built more than 1 million units a year since the 2008 recession.

Additionally, over a third of U.S. families and individuals are cost burdened, having more than 30% of their income utilized for housing. The need for low-cost housing alternatives continues to rise. For this reason, we will recommend to maintain the continuation of our current dividend to our Board of Directors at the next quarterly meeting, not withstanding the current shortfall.

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

Anna Chew

Thank you, Sam. Core funds from operations or core FFO was $3.2 million or $0.15 per diluted share for the second quarter of 2014, compared to $3.1 million or $0.17 per diluted share for the second quarter of 2013.

Core FFO, excluding securities gains was $2.5 million or $0.11 per diluted share for the second quarter of 2014, compared to $2.7 million or $0.15 per diluted share a year ago. As Sam mentioned, core FFO is trending higher over the past two quarters, sequentially.

Rental and related income for the quarter was $15.8 million, compared to $13.8 million a year ago, an increase of 14%, primarily due to the acquisition of 14 communities since the prior period.

Our community operating expenses for the quarter were $8.3 million, compared to $6.9 million a year ago, representing an increase of 20%. Community operating expenses for the quarter were 52.9% of rental and related income, a reduction from the 54.5% for the year ended December 31, 2013 and the 55.8% in the first quarter of 2014.

Income from community operations amounted to $7.4 million for the quarter, compared to $6.8 million a year ago, representing a 9% increase.

Sales of manufactured homes amounted to $2.4 million or 40 homes and $2.3 million or 43 homes for the quarters ended June 30, 2014 and 2013, respectively.

Our loss from the sales operations, including interest expense increased from $128,000 for the second quarter of 2013 to $458,000 for the second quarter this year. Increases in advertising costs, salaries and expenses associated with setting up sales centers contributed to this loss.

Setting these sales centers up and staffing them requires a capital investment, but we believe these sales centers have the potential to generate meaningful positive results going forward. The above losses do not take into consideration allocation of corporate overhead.

As of quarter end, our capital structure consisted of approximately $239 million in debt of which $176 million was community level mortgage debt and $63 million were loans payable, 95.4% of our mortgage debt is fixed rate. So weighted average interest rate on our mortgage debt is 4.8% and the weighted average maturity is 5.6 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 $225 million and our $239 million in debt gives us a total market capitalization of approximately $556 million at quarter end.

From a credit standpoint, our net debt to total market capitalization was 41%. Our fixed charge coverage was 1.7 times and our net debt-to-EBITDA was eight times.

From a liquidity standpoint, we ended the quarter with $11 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. After the quarter, we drew down the $5 million in availability to fund our recent Ohio acquisition.

We also had $6 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $62.8 million in marketable REIT securities, encumbered by $13.1 million in margin loans at 2% interest.

Generally, 50% of the market value of REIT securities maybe borrowed on margins. At the end of the quarter, we had $5.5 million in net unrealized gains on our securities investments, in addition to the $1.2 million in total gains realized thus far in 2014.

And now, we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Brian Hollenden of Sidoti.

Brian Hollenden - Sidoti

Good morning, guys, and thanks for taking my call.

Samuel Landy

Good morning.

Brian Hollenden - Sidoti

Can you give us an update on your sales centers in terms of how they are performing and how many there are?

Samuel Landy

Well, first, we just opened a brand new sales center at Port Royal Village in Belle Vernon in Pennsylvania and it was extremely well-received number of very real customers. It's too early to really say there deals, but we think we have six potential deals just from the first week. They are land home deals, five outside the community, one inside the community.

But the other sales center you have the Sunnyside in the Somerset, Pennsylvania area, Kenny Burke in the Monticello area, Heather Highlands and that's probably it for free standing sales centers in front of the community.

Eugene Landy

So, everyone, this is Gene Landy, Chairman. UMH is unique in this regard, I know no one else in the industry, in the face of an industry that's declined for 250,000 sales a year to about 72,000 now, that is gearing up recovery at the industry and we are opening these sales centers.

One, we think, we can make money with them and two, a necessity, there is no competition. There is no, what we used to call street dealers, the mom and pop operations that used to sell homes that fill out parks out there.

So we are planning to do it ourselves and we are hopeful that it industry recovers that these sales centers will generate substantial sales for the company, substantial profits and fill the 3,000 vacancies we have in our communities.

Brian Hollenden - Sidoti

So before that you have now, I mean, do you plan on opening another four over the next year or is that kind of wait and see how these four perform?

Samuel Landy

Yeah. It's wait and see how they do. Well, the current scenario is that past year the sales have been pretty much the worst they've ever been and as recently as a week ago I might have told you already to give up on sales. But the last week has been pretty good with sales and not just the opening at Port Royal Village but another community D&R Village had four sales on one week.

And sales are very dependent on economy and how people feel. The past month we sold eight homes with six of those being cash deals. That's relatively unusual because usually about 50% of the deals. So if we had six cash deals you would think we have 12 deals with six outside finance.

But a cash buyer of manufactured home is getting the best deal there is. If you are paying less than $100,000 for a house and you have $100,000. There's probably no better deal than a manufactured home.

Problem is, if you are buying a finance house, our interest rates are higher than on conventional houses. So when you start having finance deals, maybe we're not as competitive with the land home deal.

So then your normal buyer would be a buyer kind of necessity, they can’t -- they have difficulty with their credit and so they are willing to pay the higher interest rates. But the current scenario is it's not legal to finance people with bad credit even if they are coming from a $300,000 house to an $80,000 house.

So these laws pertaining to financing have our hands tied so we get plenty of interested customers but we can't sell to them. Fortunately we can rent them and our rental demand is extremely strong and our rentals are doing great and absent an improvement in sales we can take every home we have an inventory and rented out within six months.

But there is a lot of reasons to believe that in the regions we are located in people income are going to increase through Marcellus and Utica Shale, if home sales pick up again and these things happen, these were profitable sales centers that will be profitable again and we just have to continue to wait and look for this increase that we are seeing a little bit of an August and hopefully it will just get better.

Brian Hollenden - Sidoti

Okay. So you see the financing improving going forward here?

Samuel Landy

Well, it is difficult to say. There are financing alternatives available. This program we entered into with 21st Mortgage should be very good for the customer. But the number of applications that get turned down because they cannot qualify under the SAFE Act and Dodd-Frank is an incredibly high number and those people are great rental customers, they're great customers but we can't sell to them.

And until we can is a major headwind, the fact that there are cash buyers buying the homes for cash, tells me what a great product is and how well priced it is, that people are willing to take $80,000 which is their whole life savings and buy a house from us is a fantastic positive statement about the product in the community and we'd like to be able to take 10% down from people and sell them houses. But the current laws are really putting a damper on that.

Eugene Landy

This is true, not just for manufactured housing, conventional homes are having the same problem. The first-time homebuyers for existing units are down 50%. They used to be 40% of the market and now they are 20% of the market. And First-time homebuyers for new homes is astounding, it used to be 24% of the market, it's 2.4% of the market.

So these laws have basically decimated the first-time homebuyer. The first home -- first-time homebuyer almost by definition is going to struggle to make its mortgage payments and under the current laws and regulations, there's really very little way to get him financing. We are hopeful that there will be changes in the law but it will take time.

Brian Hollenden - Sidoti

Okay. And then if I could switch up the questions a little bit. About how long after you make an acquisition do these expenses begin to normalize after you up -- after you make the upgrades to your property purchases?

Samuel Landy

Each community is different. I just took someone on a tour of communities we purchased two years ago and some communities are in very good shape as is. And so you're going to make some capital improvement in some additional expenses the first year and the second year you'll be fine.

Other communities, I'm thinking specifically about Colonial Heights just half an hour outside of Pittsburgh. Even into the second year, you are still having high expenses and you probably still have them in the third year. But it won’t be more than three years. And every community we've acquired, I'm extremely proud of our entire staff, our Vice President of Acquisition, Vice President of Operations, Vice President of Engineering.

We truly upgraded these communities. We've added approximately 200 rental units this year. We plan to add 400 rental units during the course of the year. And they're getting these homes in landscaping lots, making our place look beautiful and filling the houses. And it's going extremely well. And so it's not shorter than a two-year process but some communities who purchase are in really good shape and it's only a 12-month process.

Brian Hollenden - Sidoti

Okay. Can you talk about the acquisition, what you're seeing out there in terms of cap rates with some of the deals that you’ve recently done and what you're looking at. Are we still talking about cap rates that are in the mid-7%?

Eugene Landy

It's getting more and more difficult. This is not just true for manufactured housing, it’s true for all of the REITs and all of the real estate. Cap rate continue to decline. Competition is fierce. UMH is continuing to buy products because we’re staying a little bit below the radar screen and we are buying 3 million, 5 million, 10 million. As you know, there has been a major acquisition announced for $1.2 billion to and the announcement says that there were 80 bidders who were the original bidders for that package.

So there's tremendous competition and cap rates continue to fall. As Sam pointed out, we're very proud of the acquisitions we’ve made. We’ve taken the company from 6,000 sites, 7,000 sites to 15,000 sites and we did it at much lower prices and higher cap rates in the present day. But we're at 15,000 units today and we are trying to continue the acquisitions and to get the company up 17,500 to 20,000 sites.

But it's not easy. The original game plan was to buy $100 million before exit, 7.5 cap rate and you’ll finance it at 5%, pick up $2.5 million plus the future which is a more important thing and the asset will be valuable, very very difficult to do that today. Cap rates are probably sub 7%. And even it at those rates, it's very difficult to find a community. The positive side of that is UMH is sitting with 15,000 sites and it's a very valuable company.

Brian Hollenden - Sidoti

Appreciate the color. Just one final follow-up and I’ll jump into the queue. Just quantifying a little bit more over the next year or two about how much capital do you plan on deploying within the next 12 to 24 months?

Eugene Landy

When we think capital, we renovate conservative REIT and it’s low leverage and we think we're at the point now that we should be able to refinance the entire company and generate $50 million or $100 million not of -- and we will be able to redeploy $50 million to 2 $100 million over the next two years. So the structure now is to work on trying to take advantage of current low interest rates, refinance the company. How many parts we have, Anna?

Anna Chew

We have 88 communities right now.

Eugene Landy

And what’s our debt.

Anna Chew

Our debt is $176 million in mortgage debt and we have approximately $60 million in loans.

Eugene Landy

So we have a wonderful portfolio and the game plan is to refinance it, generate $50 million or $100 million and put that $50 or $100 million to work. Now, to get to that point -- to be sure, we get to the point we continue to use the -- raise the additional equity capital but at some point, we’re going to be in a position to make a major refinancing of UMH.

Samuel Landy

And just in regard to the capital needs, last year we added 300 rental units. This year we’re going to add 400 rental units. When I told that to one of our shareholders, he said why aren’t you getting 500 units. We thought about it and so our goal for 2015 will be 500 rental units. So that will be…

Eugene Landy

And we've been doing that with cash. So 400 rental units, counting the cost of installing them, it's well above $60 million. That's the advantage of having a well-capitalized company.

Brian Hollenden - Sidoti

All right. Thank you for your comments. I’ll jump back into the queue.

Operator

And our next question will come from Craig Kucera of Wunderlich Securities.

Craig Kucera - Wunderlich Securities

Yes, hi, good morning.

Samuel Landy

Hi.

Craig Kucera - Wunderlich Securities

Was going to ask you and maybe you already answered my question but you have seen the improvement in the same store occupancy. Did you see any improvement kind of throughout the quarter, any pickup in traffic levels or should I kind of take from your comments early on, sales that has been not so great until maybe kind of where we are in the third quarter?

Samuel Landy

The traffic has actually never been bad. Okay, the traffic has always been good and the number of applications is higher than ever, which is why the rental units do so well. This past week was a phenomenal week for potential customers. Prior to that, however, sales are not near where they should be. And you go back to the first quarter, the first quarter the problem was that people learned how to make the applications under the new rules that delayed everything three months.

You go to the second quarter, while people were getting approved and they're not getting finance and so they kind of lose interest in purchasing. At this moment, you are at that time when people -- it's right before you go back to school. So it's always a very busy time but we are seeing some positive signs that there is just no way to know whether or not they’ll continue but they look pretty good right at this moment.

Eugene Landy

And we don't know -- the method of selling at present is to sell from each community with models on a community. And we are experimenting and it's not been a very expensive relatively expensive capital intensive thing to open these sales centers but we're hopeful that this idea will work as we didn't originate the idea.

I mean, historically when the industry is doing well, there were super sales centers like some of our sales centers are located with historically a successful sales center 10 years ago. And these sales centers sold 20 or 30 million in homes and were very successful. The question is does the customer preferred to go to a sales center, where you can see a multitude of models and retail outlet on the highway at a good location or does it like to be in the -- go to the community itself. And we are trying both methods now.

Craig Kucera - Wunderlich Securities

Got it. And so working with 21st Mortgage, I know early in the year that you guys had hope that would, kind o, help people out a bit as far as qualifying. I believe and please refresh my memory, those mortgages are 200 basis points inside roughly of where you would be pricing things and other criteria any tighter than the way you do things or is it basically [Technical Difficulty] criteria but maybe 2% cheaper.

Samuel Landy

They are not tighter. The 21st deal was able to solve some problems but they can't solve the debt-to-income ratio problem which is the number one problem. Imagine somebody is forced out of a $200,000 house and now they want to buy an $80,000 house. All this matters to me is down payment in income.

They give you 10% down and 30% of their income covers their loss trends in finance payments, a person is going to pay you. A person who is satisfied with the product and has the ability to pay and they are going to pay you. When this artificial criteria of debt-to-income ratio gets put into the plate, these people get decline for financing and we can't sell them the house and they will be perfectly good customers. So we wind up renting to them and nobody's been able to find a solution to that. And that's the gigantic problem that’s out there.

Craig Kucera - Wunderlich Securities

Got it. With the fund community’s deal, obviously that's a really large deal. You guys had grown significantly in the past few years with more of a -- what I would say, it’s more of a piecemeal basis. Could you -- do you think you could integrate a large transition like that. What would that -- how challenging would that be to bring that into your system?

Eugene Landy

First I have to say that the staff did an amazing job integrating what we did. We went -- we had to put in a new accounting system, run two accounting systems at the same time. We had to double the size of the company. Though I don't, I want to make sure how difficult it was the long hours people had to put in the effort involved. Having done it once, I think we can do it again in fact.

We keep the company in a position that if we were offered a portfolio of $50 million or $100 million in parts, we would not hesitate to do it either by capital we strength, personnel we strength with the capacity of management. So we can handle $50 million or $100 million. Could we have handled the -- no, we couldn’t handled what the Sun Communities did, they have their hands full at $1.2 billion.

Craig Kucera - Wunderlich Securities

All right. Thanks. Appreciate the color.

Operator

And our next question will come from Stephen Dye of Robert W. Baird.

Stephen Dye - Robert W. Baird

Hi, good morning.

Anna Chew

Good morning.

Stephen Dye - Robert W. Baird

I was just wondering if you could help me quantify if there are any one-time items in operating expense figure. There's usually some sort of home demolition or tree removal expenses. And you know what that number is for this past quarter?

Anna Chew

For this past quarter, it’s approximately $250,000 to $500,000. As we said, we always have these type of expenses when you purchase a community because a lot of times the prior owner would not -- would leave the trees the way they are, they would leave the homes there and it's up to us when we upgrade the community to move them.

Stephen Dye - Robert W. Baird

Okay. And you have a sense of what those costs will be with this $17.6 million and the additional acquisition in the third quarter?

Anna Chew

I would guess that it would be approximately the same because our -- it's approximately the same dollar value of acquisitions that we‘ve had.

Samuel Landy

The important thing to know and people have been on the call before already know but I’ll just repeat it again. Communities -- the goal is for communities that are over 90% occupied to operate either at a 50% expense ratio if we pay the water and sewer or at 30% expense ratio if it separately metered to the customer.

And we have a portfolio of mature communities that we manage for years and that's where the numbers will be after you get the occupancy over 90% and you make all the capital improvements and take care of all the deferred maintenance. As of August, our rent roll is up to $5.45 million which annualized would be $65 million per year. In 2012, our monthly revenue was only $3,500,000 and 2013 our August revenue was $4,690,000. So we’re up to $5,450,000 in monthly revenue. These acquisitions will eventually go to -- the revenue will eventually come to the bottom line at 30% to 50%.

Stephen Dye - Robert W. Baird

Right. Okay. And then just talking about rental, so you’re going to add -- it seems like a lot this year and next year. You mentioned that you are at 15.7% of total occupied sites of rentals. What number would you like that to be at? Are you happy where it is now just a little more color on that and kind of the future of the rentals business?

Eugene Landy

Let me be clear. It's not a better situation. We buy 1000 units with 200 vacancies. We’re going to put 50 new rental units in there. That was the game plan when we bought the units. So we’re not taking this added portfolio and adding 300, 400, 500 units. We're taking a portfolio that's growing 1000, 2000, 3000 units over two, three years.

And we will be adding -- we'd like to keep the rentals to 10% but we have no ceiling on it at the present time but the demand is there. We’ll put rental units in and then we’ll do the same thing on community is doing. We will try to set up a program to convert renters into owners and seldom the used units over years as they proved their credit and the ability to pay for the housing.

Samuel Landy

We’ve discussed this in the past and basically because of the change in demographics that people are less interested in signing long-term notes. They are more mobile the fact that financing is unavailable. Rentals are just the way to go. And at this time we don't want to create just a random percentage of that's how many rentals we’re going to put in.

We’re going to put in as many as demand dictates keeping in mind that certain [Technical Difficult] certain lots are really only made for double-wide and home sales. And so those communities you would never put rentals in. But there's other communities that you really shouldn't say I only want 20% rentals in this community. You should just make the decision that you’re going to maximize your income in this community by maximizing the number of rentals you put in it. That's what we do.

Stephen Dye - Robert W. Baird

Great. Thank you.

Operator

And I’m showing no further questions at this time. I would like to turn the conference back over to Samuel Landy for any closing -- I apologize. We do have a question. If you’d like to take one more from Mike Boulegeris of Boulegeris Investments.

Eugene Landy

Of course, we’ll take one from Mike Boulegeris.

Mike Boulegeris - Boulegeris Investments

Thank you for taking my questions. Good morning everyone.

Anna Chew

Good morning.

Mike Boulegeris - Boulegeris Investments

Samuel, in the release you indicated that the same site occupancy increased 130 basis points 82.6% which is up year-over-year and up sequentially. Do you see this trend continuing throughout the remainder of the year? And is there enough stability in that trend where you could maybe give us some additional clarity as to where you think that same site occupancy might be at year end?

Samuel Landy

Sure. Out of all of our communities, only two communities had any decline in revenue and neither one of them was really meaningful. It was just taking houses out. Other than that the rental units are feeling pretty much as quick as we put them in. They have -- we have 93% rental occupancy which is just incredible. And everyone out in the field, they’re just -- as soon as their house is set up, they are ready to go, it's rented. That is just tremendous.

So we’re going to keep doing that and that keeps growing revenue and occupancy. And I do believe that we could put 500 rentals in next year and fill all of them. So we're very excited about that. We’ve have a few communities that we owned have reported 100% occupancy. So we're seeing positive trends through the rental unit program.

Mike Boulegeris - Boulegeris Investments

The program you talked about in terms that you lost your distribution network industry data, I guess, and you have your sales centers now. You also alluded to I think, in the past a billboard campaign internet or intranet activity and marketing. Can you just give us an update as the whole program kind of coalescing into getting some traction there or is it still work in progress?

Samuel Landy

Well, here what's going on there. Everything we're doing is obviously working because you see it in the rental units and you see it in the occupancy. The problem that exists is your standard customer who goes to a manufactured home community. They're going to qualify as a rental resident. But there's a whole world of people who have never thought of manufactured homes in land leased communities as their housing alternative.

And those people may have higher income and higher down payments and better credit and that's a group of people we have to market to, that we haven't marketed to it in the past. I just hired an additional public relations firm called Source Communication. And the coincidences so amazing, I almost can't give them credit, they only started with us three weeks ago and at D&R Village we’re going to have four home sales this week. It’s just too amazing.

But what we have to do is we have to get to the whole, suburban mom, suburban family, that’s just never thought a manufactured home community is the place for them and get them to know that our houses are better than ever, our pricings better than ever. This is the best housing choice you could make. We can save you a minimum of $3,000 per year and put you in a better house, why don’t you come and look.

So we just in the past two months, we've increased the money we're spending to get that message up. And I want to continue to increase it because it's my belief that that's the only thing that will get you through this finance problem is to get higher quality customers who have never thought of us in the past.

Mike Boulegeris - Boulegeris Investments

And to your NAREIT presentation, you did had a slide to talked about the Saratoga acreage that UMH Properties does have. Any further plans in developing some of those -- some of that acreage?

Samuel Landy

Sure. In response to the fact that in the Saratoga area in Clifton Park, we're doing well. We had a 50 lot expansion approved at Brookview Village in Saratoga and we let the approval lapse because they were approved in 2007 and nobody wanted to build anything. We’re reinstituting those approvals right now and hope to build those 50 lots next year and there's a lot of reason that that will do well.

We have the (Indiscernible) project 228 acres that we’re going to take 60 acres and try to get 180 lots approved. We have expansions that were built in the good times that have vacant lots and these are things that are costing us money today in and have costed us money the last four, five years. We’re trying to sell homes on vacant lots and you keep putting in the effort and the effort cost money and you're not getting the results.

But those one in particular's Somerset we’re starting to see some positive activity and if they all got going, it would really have a significant change in the loss that’s coming from sales becoming a gain. So people value UMH strictly based on income and people lose sight of the fact that we have a sales loss caused by a bad sales atmosphere, that can easily go away and turn into a profit. And we have all of this vacant land that earns no income but it's extremely valuable.

We have the cost of engineering. My father used to say it was one-time of thousand per lot, it’s far more than that now. So each potential vacant lot that was once were 10,000 a sites, probably were 20,000 a site, might be worth more than that now. So we continue to work on those and we are ready to go when demand dictates it's time to build themselves.

Mike Boulegeris - Boulegeris Investments

Okay. And thank you for that clarity. And then finally maybe I could direct this to Gene. You mentioned, Gene earlier in your comments that you refer to some acquisition and just to be interesting to hear your thoughts on the intrinsic value of UMH Properties. As Sam mentioned, that should be sale in assets and so to speak and certainly their replacement cost, one would assume would be much higher for many of these properties you've acquired over the last several years.

But as you intend, we’ve have been at this quite some time, I just be interested to hear your thoughts as to the intrinsic value of UMH and how you believe the company is positioned in the comp for the coming years.

Eugene Landy

You see that I have been in the REIT industry for 45 years. 34 years ago we choose to announce what they thought the value of the company was, but that's pretty much discontinuous. And we don't come up with a number, though those were relatively simple number. You know how many sites we have, how many parts we have, how much securities cash and bullish receivables we earn, it would take a good analyst to $0.50 an hour to come up with a pencil number.

And we think, no matter how you look at it, UMH at its current market price sales at a substantial discount from its real value. Some communities, when they announced their $1.2 billion acquisition announced that they were buying these parts substantially at low replacement cost. And again our engineers, their engineers, they announced that the cost to replace to build a replacement site was $75,000 a site.

I don't disagree with that. It costs at least $50,000 a site and probably $60,000 a site to build it that does not include the land and doesn't include the inherent cost of the value. It takes years to do and years to fill. So, when we buy these parts, we know we’re buying them in these communities. When we buy them for $35,000 or $36,000 a site, we're buying them substantially below replacement cost. And if you value UMH you can see they are selling substantially below the replacement cost of the communities we own.

Mike Boulegeris - Boulegeris Investments

Okay. And lastly, Gene you mentioned, the potential refinance of the company. Is the grow strategy, obviously, you are synchronizing a lot of things, but is there anything magical about the 17,500 or 20,000, does that give you a critical mass that allows you to do other things outside of what say the financial efficiencies?

Eugene Landy

Basically, I've been very sensitive to efficiency. As you know, we invest in another REITs and I study other REITs administrative costs. And UMH, It’s administrative costs is well below even the cost of small cap REIT but it is still too large a percentage of our gross income and net income and to be an efficient public company we have to get this thing up to. In my opinion, I used to pick a small number, but today I would think, we have to get it up to at least $20,000 a site and be $1 billion REIT to operate efficiently as a public company.

It doesn't get less expensive. It gets more expensive with all the rules and regulations and accounting technicalities. It costs a lot of money to run a public company. And we would be much more efficient company at $20,000 but we used to run it at $6,000, $7,000 a site. So at $15,000 it’s better. We’re going to make it even better and get it up to $20,000 and be an efficient company.

Mike Boulegeris - Boulegeris Investments

Well, thank you Gene, Sam and Anna for your comments today.

Samuel Landy

Thank you.

Anna Chew

Thank you.

Operator

And the next question will come from David Minkoff of DCM Asset Management.

David Minkoff - DCM Asset Management

Good morning, guys and girls on this day today.

Anna Chew

Good morning.

David Minkoff - DCM Asset Management

I'm glad to see the rental program is going well. I've been a proponent of that for a while as you know. Of the 40 homes that you sold this quarter, how many if any were split from rentals?

Anna Chew

Those were primarily -- when we had the sales of home, those were homes that were not rentals as a matter of fact. They were…

David Minkoff - DCM Asset Management

The pressure on rental is relatively new. So I guess in the next year or two, you may see more of them converting hopefully. Is the -- are the new sales offices going to be the ones that handle the program for rentals to buy or is that going to be separate for us?

Samuel Landy

Each community manager already knows. Every single home we rent, the customers offered a lease with option to purchase. And the manager actually gets a higher leasing commission, if they get the lease option to purchase sign. It surprises us that 100% of the leases aren’t lease option to purchase but they're not.

And so we do quite a few lease option to purchase and it's not a substantial number, but lease option to purchases do turn into sales. In fact, many of our sales this year are leases with option to purchase where somebody exercise their option.

David Minkoff - DCM Asset Management

Correct. Well, you would think that would be -- as time goes on and people living there on a rental basis longer, you would think that the sale to a rental person would be easier because they're already living in a community for while and presumably are happy there? So with the proper incentive, I guess, that should be perhaps an easier sale than a new sale to someone who's never kick the tires at the community, right?

Samuel Landy

And we're absolutely certain of that, not only are we certain of that, but when our customers make money, so somebody rented the house and that time they only had $5,000 in their pocket.

David Minkoff - DCM Asset Management

Okay.

Samuel Landy

If at any point in time they make money they will buy the house and if their income goes up and suddenly they can finance the house, they will buy the house.

David Minkoff - DCM Asset Management

Okay. I would point out to you today, if you may have already seen. In page Wall Street Journal, there is a real estate section and the lead article is entitled million dollar trailers and has not mobile home. Did you see that article yesterday?

Samuel Landy

I didn’t.

Eugene Landy

I saw it today, it’s a…

Susan Jordan

Land in California.

Eugene Landy

Yeah. Essence some other communities to have very expensive parks because they are waterfront parks so they…

David Minkoff - DCM Asset Management

That was in Malibu beach, I think.

Susan Jordan

Rigth.

David Minkoff - DCM Asset Management

Malibu beach, they give an example of a trailer that sold for $1.25 million. But I thought that was interesting that the trend is even going that way. So the numbers basically are getting bigger, the revenues are going up, the census are going up and the number of shares are going up, of course, as well, are you financing some of these purchases with more shares outstanding. But per share number unfortunately is down a little bit, so while you're getting bigger not necessarily getting better. Why is that? You said, the financing rates are pretty good right now? Why isn't the efficiency of it working to our advantage where even the per share numbers go up?

Samuel Landy

I'm absolutely positive that it will eventually that the brilliance of the company is the capital structure that there is 20 million shares and its 21 million shares and 500 million to 600 million in assets and what we've done with the money is we bought property that are going to take a little time to maximize income and on top of that you have a sales program that worth $2 million last year.

Through the most difficult period of manufactured housing ever had, we’ve continued to maintain the current dividend and we've growing dramatically. As the upside comes and there's two different upside.

One is just the upside in manufactured housing that will be in Florida and two is because we’ve selectively located in the Marcellus and Utica Shale area or other high growth places like Nashville, we are really going to benefit from that.

So eventually, it is going to come directly to the shareholder and it's going to come -- we look at public storage and what they did with their preferred stock and how the common was one of the best performing REIT stocks there was and that's exactly what we are model thereafter.

David Minkoff - DCM Asset Management

Very good.

Eugene Landy

Let me just, analyst and shareholders, you have to take a longer-term view and don't use to sharper pencil. If in fact the market turns and housing is good and we fill 3,000 vacancies, if we take out $2 billion sales loss and convert that to a profit, and if we could get reasonable rent increases every year, which cover both increase in expenses and greater profits. And you look at those numbers, those are very large numbers for the small company and shareholders will be very satisfied.

We went through 20 years of prosperity where we took this company from a $1 a share to $17 a share, and we went from a $0.10 dividend to a $1 dividend and we just need to repeat of those conditions, which again is just fundamentals. The demand for housing exceeds supply, all of those things may happen. We can't guarantee it, but that's why we're in the business and that's why we work so hard.

David Minkoff - DCM Asset Management

Fair enough. And I hope it comes to past. I think it will. So just let it play out a little bit longer is what you are saying.

Eugene Landy

Exactly, yeah.

David Minkoff - DCM Asset Management

Very good, guys. That's all I’ve got. Good luck.

Eugene Landy

Thanks.

Susan Jordan

Thank you.

Operator

And the next question comes from [Bruce Winter] (ph) of. Go ahead please.

Unidentified Analyst

Yes. Thank you. You are in the Marcellus Shale and the Utica Shale. So, I've seen on TV pictures of the North Dakota Shale and they are building places like yours all over the place and there's a big public company that has things like yours in Canada and Australia and all over the place huge? So, I'm looking at the financial statement. Is there any evidence in the financial statements that this Utica Shale and Marcellus Shale is playing out for you?

And secondly, is there any anecdotal evidence that you have like some giant oil company coming in and taking 20 or 30 sites for five or 10 years or whatever?

Eugene Landy

Let me answer that. We don't tell anyone and don’t let other say, whether, we are -- UMH is not in the oil and gas play. We have, Anna, how many acres in the Marcellus Shale but I know you don't want to get into that. That's not what we're talking about.

What Sam said, I thought, he said it very clearly, is we have located and we are buying parts in an area where we think there's going to be a housing boom not to North Dakota, it's a very exceptional, very small population and a huge amount of revenue.

But in the states we're in which is right now Pennsylvania and Ohio, we expect those states experience unusual growth in a way. The online areas of the Wall Street Journal said that the Utica and Marcellus Shale discoveries and development is the major story of the decade and we do see evidence of it now and we may see things happening.

We would like to see some great event like they do the refinery in Monaco, Pennsylvania for $4 billion and bring in 10,000 people to build it. But even if you don't get this colossal project, there are billions and billions of projects going on and we don't think the press covers them to the extent. The revenues from Pennsylvania last year alone was the equivalent of $500 billion.

I mean, tremendous things are actually happening now and they're going to continue to happen. The big companies, you have to invest $1 billion to make $2 billion in that business, the Shale business. And the companies are putting the money in now and we're very optimistic that we are going to get this, there will be jobs. There will be jobs in the area and there will be jobs in the Pittsburgh and there will be jobs in Harrisburg.

And we think that the future of Pennsylvania is like the future of -- the proven future of Texas and that it's going to be a great place to have the number of communities we have and that's why we buy parts that are 80% occupied and that don't have greatest return but they are right in the heart of where we expect this development to come and that's why we do it.

And the oil and gas revenues are only incidental. We have to pick up a few million dollars but that's not what we are talking about. We are positioning UMH to benefit from the economic resurgence of Pennsylvania Ohio and those areas.

Unidentified Analyst

Okay. Thank you.

Eugene Landy

Thanks.

Operator

And this will conclude 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 Eugene, Anna and I are available for any follow-up questions. We look forward to reporting back to you back after our third quarter.

Operator

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