A month ago, UMH Properties, Inc. (NYSE:UMH) was one of the featured REIT stocks in my article on "5 Small-Cap REITs With Attractive Dividend Yields." Now, the company has announced a couple of property acquisitions, which boost the number of mobile home communities in the portfolio by 25% and the number of home sites by 13%. UMH's management believes the current economic and housing environment provides significant opportunities to grow the portfolio and profits. The balance of 2012 should reveal whether the growth plans provide a growing dividend for investors.
With the recent acquisitions, UMH Properties now owns 53 manufactured home communities with over 10,000 home sites. The company's primary source of revenue is home site rentals. Additional revenue comes from manufactured home sales, manufactured home rentals and a mortgage portfolio of loans on sold homes. UMH also owns a $43 million portfolio of REIT common and preferred stock shares. The portfolio throws off a significant amount of dividend income and - in recent years - capital gains from the sale of securities.
UMH Properties carries approximately a 50% debt-to-real estate book value ratio. Acquisition financing comes from the issuance of the company's series of 8.25% preferred shares, mortgages, a line of credit and DRIP plan investments. From owning around 8,000 home sites at the end of 2010, the company is on track to meet the goal of 10,500 in 2012 and forecast ownership of 12,500 sites in 2013.
The manufactured home community business is a profitable business. In 2011, UMH reported rental income of $33 million and community operating expenses of $17.8 million, with a 77% occupancy rate. With the recent purchases indicating a $29,000 per site value and the company's $425 per month average rental rate, the return on the purchase value runs about 9% per year, un-leveraged. The two recent acquisitions of 12 communities have better than 90% occupancy, so the cash return number is probably higher than the assumptions used here.
Against this profitable core business, UMH has a lot of outgoing cash flow. The home sales division lost about $1.5 million in 2011 on sales of $6.3 million. General and administrative expenses were $4 million in 2011, interest expense was $5.7 million and $1.7 million of preferred dividends were paid. These additional expenses total about $12.9 million. These costs sucked up the major portion of the $15.2 million of gross profit from rental income.
The REIT securities portfolio saved the day, producing $4.5 million of interest and dividend income and $2.7 million of realized capital gains. The result of my generalization of revenue and expenses is a positive $9.5 million of cash flow. I left out several lines on the actual income statement and UMH reported adjusted funds from operations - FFO - of $9 million for the full year 2011. Last year was a tough year for UMH due to several factors. FFO in 2011 was $11 million.
The current dividend of 18 cents quarterly requires a cash payout of $2.7 million each quarter based on 15 million shares outstanding at the end of 2011. That produces an annual dividend run rate of $10.8 million. You can see from the analysis above that UMH did not earn enough to cover the dividend in 2011. First quarter FFO was $2.66 million or 17 cents per share - still a little short of the money required to cover the dividend. With the recent acquisitions and what the UMH management believes is a better economic environment for their product, investors should watch for a couple of trends to occur:
- An improving occupancy rate. Renting out empty spaces - the company has over 2,000 available - brings extra revenue with little or no extra expenses. The recently purchased communities should push the rate up to about 79%. Each 1% increase in occupancy should add $130,000 to the quarterly FFO. The occupancy rate was in the 90% range before the housing bubble.
- An increase in new home sales at least to a level that the gross profits on the sales cover the fixed expenses of the sales organization. The result would be an extra $400,000+ in FFO per quarter.
If these things happen, the total FFO and per-share FFO should start increasing quarter by quarter. UMH Holdings has opportunity and potential to produce higher profits and higher dividends. Now the company must show these things will happen. For the balance of the year, investors should expect the company to generate enough FFO to cover the dividend with the fourth-quarter results much better than the first quarter. Hold the shares and collect the 6% dividend and watch for improving results. If the cash flow is not significantly better over the next three quarters, it may be time to look for a better investment options.
UMH Holdings has the same address and top management personnel as Monmouth Real Estate Investment Corp. (NYSE:MNR), an industrial properties REIT. About one-third of the UMH REIT securities portfolio is shares of Monmouth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.