0001641172-20-000033.txt : 20201104 0001641172-20-000033.hdr.sgml : 20201104 20201104161539 ACCESSION NUMBER: 0001641172-20-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 59 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201104 DATE AS OF CHANGE: 20201104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UMH PROPERTIES, INC. CENTRAL INDEX KEY: 0000752642 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 221890929 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12690 FILM NUMBER: 201286879 BUSINESS ADDRESS: STREET 1: 3499 ROUTE 9 N, SUITE 3-C STREET 2: JUNIPER BUSINESS PLAZA CITY: FREEHOLD STATE: NJ ZIP: 07728 BUSINESS PHONE: 7325779997 MAIL ADDRESS: STREET 1: 3499 ROUTE 9 N, SUITE 3-C STREET 2: JUNIPER BUSINESS PLAZA CITY: FREEHOLD STATE: NJ ZIP: 07728 FORMER COMPANY: FORMER CONFORMED NAME: UNITED MOBILE HOMES INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10-q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ___________

 

Commission File Number 001-12690

 

UMH PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   22-1890929
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   identification number)

 

Juniper Business Plaza, 3499 Route 9 North, Suite 3-C, Freehold, NJ   07728
(Address of Principal Executive 0ffices)   (Zip Code)

 

Registrant’s telephone number, including area code(732) 577-9997

 

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of exchange on which registered
Common Stock, $.10 par value   UMH   New York Stock Exchange
6.75% Series C Cumulative Redeemable Preferred Stock, $.10 par value   UMH PRC   New York Stock Exchange
6.375% Series D Cumulative Redeemable Preferred Stock, $.10 par value   UMH PRD   New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

Indicate the number of shares outstanding of each issuer’s class of common stock, as of the latest practicable date:

 

Class   Outstanding Common Shares as of November 2, 2020
Common Stock, $.10 par value per share   41,709,519

 

 

 

 

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2020

 

Table of Contents

 

PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
     
  Consolidated Balance Sheets 3
     
  Consolidated Statements of Income (Loss) 5
     
  Consolidated Statements of Shareholders’ Equity 7
     
  Consolidated Statements of Cash Flows 11
     
  Notes To Consolidated Financial Statements 12
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
     
Item 4. Controls and Procedures 39
     
PART II - OTHER INFORMATION    
   
Item 1. Legal Proceedings 40
     
Item 1A. Risk Factors 40
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
     
Item 3. Defaults Upon Senior Securities 41
     
Item 4. Mine Safety Disclosures 41
     
Item 5. Other Information 41
     
Item 6. Exhibits 41
     
SIGNATURES 42

 

2

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(in thousands except per share amounts)

 

   September 30, 2020    December 31, 2019 
   (Unaudited)     
- ASSETS -          
           
Investment Property and Equipment          
Land  $73,436   $72,459 
Site and Land Improvements   639,519    618,041 
Buildings and Improvements   27,584    27,380 
Rental Homes and Accessories   338,887    297,401 
Total Investment Property   1,079,426    1,015,281 
Equipment and Vehicles   22,030    21,145 
Total Investment Property and Equipment   1,101,456    1,036,426 
Accumulated Depreciation   (262,524)   (232,783)
Net Investment Property and Equipment   838,932    803,643 
           
Other Assets          
Cash and Cash Equivalents   54,666    12,902 
Marketable Securities at Fair Value   85,161    116,186 
Inventory of Manufactured Homes   27,063    31,967 
Notes and Other Receivables, net   44,603    37,995 
Prepaid Expenses and Other Assets   19,355    10,762 
Land Development Costs   24,964    11,998 
Total Other Assets   255,812    221,810 
           
TOTAL ASSETS  $1,094,744   $1,025,453 

 

See Accompanying Notes to Consolidated Financial Statements

 

3

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS – CONTINUED

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(in thousands except per share amounts)

 

   September 30, 2020   December 31, 2019 
   (Unaudited)     
- LIABILITIES AND SHAREHOLDERS’ EQUITY -          
           
LIABILITIES:          
Mortgages Payable, net of unamortized debt issuance costs  $472,376   $373,658 
           
Other Liabilities:          
Accounts Payable   5,746    4,572 
Loans Payable, net of unamortized debt issuance costs   34,583    83,686 
Series B Preferred Stock Called for Redemption   95,017    0 
Accrued Liabilities and Deposits   14,682    10,575 
Tenant Security Deposits   7,397    6,623 
Total Other Liabilities   157,425    105,456 
Total Liabilities   629,801    479,114 
           
Commitments and Contingencies   -     -  
           
Shareholders’ Equity:          
Series B – 8.0% Cumulative Redeemable Preferred Stock, par value $0.10 per share; 4,000 shares authorized; 3,801 shares issued and outstanding as of December 31, 2019   0    95,030 
Series C – 6.75% Cumulative Redeemable Preferred Stock, par value $0.10 per share, 13,750 shares authorized; 9,884 and 9,750 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively   247,100    243,750 
Series D – 6.375% Cumulative Redeemable Preferred Stock, par value $0.10 per share, 9,300 and 6,000 shares authorized; 5,424 and 2,651 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively   135,589    66,268 
Common Stock - $0.10 par value per share; 140,364 and 123,664 shares authorized; 41,627 and 41,130 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively   4,163    4,113 
Excess Stock - $0.10 par value per share; 3,000 shares authorized; no shares issued or outstanding as of September 30, 2020 and December 31, 2019   0    0 
Additional Paid-In Capital   103,455    162,542 
Undistributed Income (Accumulated Deficit)   (25,364)   (25,364)
Total Shareholders’ Equity   464,943    546,339 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $1,094,744   $1,025,453 

 

See Accompanying Notes to Consolidated Financial Statements

 

4

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands)

 

   September 30,
2020
   September 30,
2019
   September 30,
2020
   September 30,
2019
 
   THREE MONTHS ENDED   NINE MONTHS ENDED 
   September 30,
2020
   September 30,
2019
   September 30,
2020
   September 30,
2019
 
                 
INCOME:                    
Rental and Related Income  $36,358   $32,948   $105,767   $94,980 
Sales of Manufactured Homes   6,765    4,382    15,013    13,867 
Total Income   43,123    37,330    120,780    108,847 
                     
EXPENSES:                    
Community Operating Expenses   16,245    15,772    47,191    45,886 
Cost of Sales of Manufactured Homes   4,695    3,271    10,713    10,117 
Selling Expenses   1,381    1,375    3,757    3,803 
General and Administrative Expenses   2,934    2,579    8,262    7,910 
Depreciation Expense   10,492    9,390    30,991    27,010 
Total Expenses   35,747    32,387    100,914    94,726 
                     
OTHER INCOME (EXPENSE):                    
Interest Income   736    650    2,144    1,787 
Dividend Income   1,183    1,858    4,481    5,734 
Increase (Decrease) in Fair Value of Marketable Securities   (6,739)   9,234    (31,921)   15,478 
Other Income   232    171    561    424 
Interest Expense   (4,524)   (4,396)   (13,144)   (13,289)
Total Other Income (Expense)   (9,112)   7,517    (37,879)   10,134 
                     
Income (Loss) before Loss on Sales of Investment Property and Equipment   (1,736)   12,460    (18,013)   24,255 
Loss on Sales of Investment Property and Equipment   (31)   (27)   (177)   (36)
Net Income (Loss)   (1,767)   12,433    (18,190)   24,219 
Less: Preferred Dividends   (8,109)   (6,811)   (24,289)   (18,220)
Less: Redemption of Preferred Stock   (2,871)   0    (2,871)   0 
Net Income (Loss) Attributable to Common Shareholders  $(12,747)  $5,622   $(45,350)  $5,999 

 

See Accompanying Notes to Consolidated Financial Statements

 

5

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) – CONTINUED (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands except per share amounts)

 

   THREE MONTHS ENDED   NINE MONTHS ENDED 
   September 30,
2020
   September 30,
2019
   September 30,
2020
   September 30,
2019
 
                 
Basic and Diluted Income (Loss) Per Share:                    
                     
Net Income (Loss)  $(0.04)  $0.31   $(0.44)  $0.61 
Less: Preferred Dividends   0.20    0.17    0.59    0.46 
Less: Redemption of Preferred Stock   0.07    0    0.07    0 
Net Income (Loss) Attributable to Common Shareholders  $(0.31)  $0.14   $(1.10)  $0.15 
                     
Weighted Average Common Shares Outstanding:                    
                     
Basic   41,421    40,513    41,275    39,592 
Diluted   41,421    40,754    41,275    39,830 

 

See Accompanying Notes to Consolidated Financial Statements

 

6

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands)

 

   Number       Amount    Series B   Series C  
   Common Stock   Preferred   Preferred 
   Issued and Outstanding   Stock   Stock 
   Number   Amount   Series B   Series C 
                 
Balance December 31, 2019   41,130   $4,113   $95,030   $243,750 
                     
Common Stock Issued with the DRIP   133    13    0    0 
Common Stock Issued through Restricted Stock Awards   26    3    0    0 
Common Stock Issued through Stock Options   29    3    0    0 
Repurchase of Preferred Stock   0    0    (13)   0 
Repurchase of Common Stock   (152)   (15)   0    0 
Preferred Stock Issued in connection with At-The-Market Offerings, net   0    0    0    0 
Distributions   0    0    0    0 
Stock Compensation Expense   0    0    0    0 
Net Income (Loss)   0    0    0    0 
                     
Balance March 31, 2020   41,166    4,117    95,017    243,750 
                     
Common Stock Issued with the DRIP   157    15    0    0 
Repurchase of Common Stock   (22)   (2)   0    0 
Distributions   0    0    0    0 
Stock Compensation Expense   0    0    0    0 
Net Income   0    0    0    0 
                     
Balance June 30, 2020   41,301    4,130    95,017    243,750 
                     
Common Stock Issued with the DRIP   178    18    0    0 
Common Stock Issued through Stock Options   31    3    0    0 
Common Stock Issued in connection with At-The-Market Offerings, net   117    12    0    0 
Preferred Stock Issued in connection with At-The-Market Offerings, net   0    0    0    3,350 
Preferred Stock Called for Redemption   0    0    (95,017)   0 
Distributions   0    0    0    0 
Stock Compensation Expense   0    0    0    0 
Net Income (Loss)   0    0    0    0 
                     
Balance September 30, 2020   41,627   $4,163   $0   $247,100 

 

See Accompanying Notes to Consolidated Financial Statements

 

7

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY – CONTINUED (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands)

 

   Number     Amount   Series B   Series C 
   Common Stock   Preferred   Preferred 
   Issued and Outstanding   Stock   Stock 
   Number   Amount   Series B   Series C 
                 
Balance December 31, 2018   38,320   $3,832   $95,030   $143,750 
                     
Common Stock Issued with the DRIP   837    84    0    0 
Common Stock Issued through Restricted Stock Awards   1    0    0    0 
Distributions   0    0    0    0 
Stock Compensation Expense   0    0    0    0 
Net Income (Loss)   0    0    0    0 
                     
Balance March 31, 2019   39,158    3,916    95,030    143,750 
                     
Common Stock Issued with the DRIP   834    83    0    0 
Common Stock Issued through Restricted Stock Awards   120    12    0    0 
Common Stock Issued through Stock Options   42    4    0    0 
Preferred Stock Issued through Underwritten Registered Public Offering, net   0    0    0    100,000 
Distributions   0    0    0    0 
Stock Compensation Expense   0    0    0    0 
Net Income (Loss)   0    0    0    0 
                     
Balance June 30, 2019   40,154    4,015    95,030    243,750 
                     
Common Stock Issued with the DRIP   645    65    0    0 
Common Stock Issued through Stock Options   32    3    0    0 
Repurchase of Common Stock   (20)   (2)   0    0 
Distributions   0    0    0    0 
Stock Compensation Expense   0    0    0    0 
Net Income (Loss)   0    0    0    0 
                     
Balance September 30, 2019   40,811   $4,081   $95,030   $243,750 

 

See Accompanying Notes to Consolidated Financial Statements

 

8

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY – CONTINUED (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands)

 

     

 

 

Preferred
Stock Series D

      Additional
Paid-In Capital
     

 

Undistributed
Income
(Accumulated Deficit)

      Total
Shareholders’ Equity
  
                 
Balance December 31, 2019  $66,268   $162,542   $(25,364)  $546,339 
                     
Common Stock Issued with the DRIP   0    1,588    0    1,601 
Common Stock Issued through Restricted Stock Awards   0    (3)   0    0 
Common Stock Issued through Stock Options   0    303    0    306 
Repurchase of Preferred Stock   0    1    0    (12)
Repurchase of Common Stock   0    (1,589)   0    (1,604)
Preferred Stock Issued in connection with At-The-Market Offerings, net   63,999    (867)   0    63,132 
Distributions   0    (50,255)   34,748    (15,507)
Stock Compensation Expense   0    574    0    574 
Net Income (Loss)   0    0    (34,748)   (34,748)
                     
Balance March 31, 2020   130,267    112,294    (25,364)   560,081 
                     
Common Stock Issued with the DRIP   0    1,728    0    1,743 
Repurchase of Common Stock   0    (223)   0    (225)
Distributions   0    2,818    (18,325)   (15,507)
Stock Compensation Expense   0    313    0    313 
Net Income (Loss)   0    0    18,325    18,325 
                     
Balance June 30, 2020   130,267    116,930    (25,364)   564,730 
                     
Common Stock Issued with the DRIP   0    2,190    0    2,208 
Common Stock Issued through Stock Options   0    313    0    316 
Common Stock Issued in connection with At-The-Market Offerings, net   0    1,466    0    1,478 
Preferred Stock Issued in connection with At-The-Market Offerings, net   5,322    (331)   0    8,341 
Preferred Stock Called for Redemption   0    2,808    (2,808)   (95,017)
Distributions   0    (20,138)   4,575    (15,563)
Stock Compensation Expense   0    217    0    217 
Net Income (Loss)   0    0    (1,767)   (1,767)
                     
Balance September 30, 2020  $135,589   $103,455   $(25,364)  $464,943 

 

See Accompanying Notes to Consolidated Financial Statements

 

9

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY – CONTINUED (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands)

 

      Preferred
Stock Series D
      Additional
Paid-In Capital
     

 

Undistributed
Income
(Accumulated Deficit)

      Total
Shareholders’ Equity
  
                 
Balance December 31, 2018  $50,000   $157,450   $(25,364)  $424,698 
                     
Common Stock Issued with the DRIP   0    10,587    0    10,671 
Common Stock Issued through Restricted Stock Awards   0    0    0    0 
Distributions   0    (1,066)   (11,037)   (12,103)
Stock Compensation Expense   0    391    0    391 
Net Income (Loss)   0    0    11,037    11,037 
                     
Balance March 31, 2019   50,000    167,362    (25,364)   434,694 
                     
Common Stock Issued with the DRIP   0    10,641    0    10,724 
Common Stock Issued through Restricted Stock Awards   0    (12)   0    0 
Common Stock Issued through Stock Options   0    431    0    435 
Preferred Stock Issued through Underwritten Registered Public Offering, net   0    (3,312)   0    96,688 
Distributions   0    (13,221)   (749)   (13,970)
Stock Compensation Expense   0    668    0    668 
Net Income (Loss)   0    0    749    749 
                     
Balance June 30, 2019   50,000    162,557    (25,364)   529,988 
                     
Common Stock Issued with the DRIP   0    7,756    0    7,821 
Common Stock Issued through Stock Options   0    326    0    329 
Repurchase of Common Stock   0    (235)   0    (237)
Distributions   0    (1,700)   (12,433)   (14,133)
Stock Compensation Expense   0    433    0    433 
Net Income (Loss)   0    0    12,433    12,433 
                     
Balance September 30, 2019  $50,000   $169,137   $(25,364)  $536,634 

 

See Accompanying Notes to Consolidated Financial Statements

 

10

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(in thousands)

 

   September 30, 2020   September 30, 2019 
   NINE MONTHS ENDED 
   September 30, 2020   September 30, 2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income (Loss)  $(18,190)  $24,219 
Non-Cash items included in Net Income (Loss):          
Depreciation   30,991    27,010 
Amortization of Financing Costs   654    559 
Stock Compensation Expense   1,104    1,492 
Provision for Uncollectible Notes and Other Receivables   1,056    972 
(Increase) Decrease in Fair Value of Marketable Securities   31,921    (15,478)
Loss on Sales of Investment Property and Equipment   177    36 
Changes in Operating Assets and Liabilities:          
Inventory of Manufactured Homes   4,904    (6,812)
Notes and Other Receivables   (7,664)   (6,748)
Prepaid Expenses and Other Assets   (666)   (3,814)
Accounts Payable   1,174    1,142 
Accrued Liabilities and Deposits   4,106    2,529 
Tenant Security Deposits   774    755 
Net Cash Provided by Operating Activities   50,341    25,862 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of Manufactured Home Communities, net of mortgages assumed   (6,274)   (37,308)
Purchase of Investment Property and Equipment   (59,427)   (49,344)
Proceeds from Sales of Investment Property and Equipment   1,919    2,129 
Additions to Land Development Costs   (12,966)   (13,731)
Purchase of Marketable Securities   (896)   (1,364)
Net Cash Used in Investing Activities   (77,644)   (99,618)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from Mortgages, net of mortgages assumed   105,984    44,850 
Net Payments on Short Term Borrowings   (49,191)   (31,576)
Principal Payments of Mortgages   (6,579)   (19,567)
Financing Costs on Debt   (3,927)   (787)
Proceeds from At-The-Market Preferred Equity Program, net of offering costs   71,473    0 
Proceeds from Issuance of Preferred Stock, net of offering costs   0    96,688 
Proceeds from At-The-Market Common Equity Program, net of offering costs   1,477    0 
Proceeds from Issuance of Common Stock in the DRIP,
net of Dividend Reinvestments
   3,225    23,579 
Repurchase of Preferred Stock, net   (12)   (237)
Repurchase of Common Stock, net   (1,830)   0 
Proceeds from Exercise of Stock Options   622    764 
Preferred Dividends Paid   (24,289)   (18,745)
Common Dividends Paid, net of Dividend Reinvestments   (19,959)   (15,823)
Net Cash Provided by Financing Activities   76,994    79,146 
           
Net Increase in Cash, Cash Equivalents and Restricted Cash   49,691    5,390 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period   18,996    12,777 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

AT END OF PERIOD

  $68,687   $18,167 

 

See Accompanying Notes to Consolidated Financial Statements

 

11

 

 

UMH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020 (UNAUDITED)

 

NOTE 1 – ORGANIZATION AND ACCOUNTING POLICIES

 

UMH Properties, Inc., a Maryland corporation, together with its subsidiaries (“we”, “our”, “us” or “the Company”) operates as a real estate investment trust (“REIT”) deriving its income primarily from real estate rental operations. The Company owns and operates 124 manufactured home communities containing approximately 23,400 developed homesites as of September 30, 2020. These communities are located in New Jersey, New York, Ohio, Pennsylvania, Tennessee, Indiana, Michigan and Maryland. The Company, through its wholly-owned taxable subsidiary, UMH Sales and Finance, Inc. (“S&F”), also sells manufactured homes to residents and prospective residents in its communities. Inherent in the operations of manufactured home communities are site vacancies. S&F was established to fill these vacancies and enhance the value of the communities. The Company also owns a portfolio of REIT securities which the Company generally limits to no more than approximately 15% of its undepreciated assets. The consolidated financial statements of the Company include S&F and all of its other wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

On March 11, 2020, the World Health Organization declared COVID-19, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The Company’s 124 residential communities remain open and operational. The effects of the COVID-19 pandemic did not significantly impact the Company’s operating results for the first nine months of 2020. However, the future effects of the evolving impact of the COVID-19 pandemic are uncertain.

 

The Company has elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code (the “Code”) and intends to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed under federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders. For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. The Company is subject to franchise taxes in some of the states in which the Company owns property.

 

The interim Consolidated Financial Statements furnished herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

 

12

 

 

Use of Estimates

 

In preparing the consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as contingent assets and liabilities as of the dates of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates and assumptions.

 

Reclassifications

 

Certain amounts in the financial statements for the prior periods have been reclassified to conform to the statement presentation for the current periods.

 

Derivative Instruments and Hedging Activities

 

In the normal course of business, the Company is exposed to financial market risks, including interest rate risk on its variable rate debt. The Company attempts to limit these risks by following established risk management policies, procedures and strategies, including the use of derivative financial instruments. The Company’s primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes. The Company previously entered into various interest rate swap agreements that have had the effect of fixing interest rates relative to specific mortgage loans. As of December 31, 2019 and September 30, 2020, these agreements had expired and the Company does not have any interest rate swap agreements in effect.

 

Leases

 

We account for our leases under ASC 842, “Leases.” Our primary source of revenue is generated from lease agreements for our sites and homes, where we are the lessor. These leases are generally for one-year or month-to-month terms and renewable by mutual agreement from us and the resident, or in some cases, as provided by jurisdictional statute.

 

We are the lessee in other arrangements, primarily for our corporate office and a ground lease at one community. As of September 30, 2020, the right-of-use assets and corresponding lease liabilities of $3.7 million are included in Prepaid Expenses and Other Assets and Accrued Liabilities and Deposits on the Consolidated Balance Sheets.

 

13

 

 

 

Future minimum lease payments under these leases over the remaining lease terms are as follows (in thousands):

 

    Sep. 30, 2020 
2020  $107 
2021   427 
2022   417 
2023   384 
2024   384 
Thereafter   8,432 
      
Total Lease Payments  $10,151 

 

The weighted average remaining lease term for these leases is 145.1 years. The right of use assets and lease liabilities was calculated using an interest rate of 5%.

 

Restricted Cash

 

The Company’s restricted cash consists of amounts primarily held in deposit for tax, insurance and repair escrows held by lenders in accordance with certain debt agreements. Restricted cash is included in Prepaid Expenses and Other Assets on the Consolidated Balance Sheets.

 

 

The following table reconciles beginning of period and end of period balances of cash, cash equivalents and restricted cash for the periods shown (in thousands):

 

   9/30/20   12/31/19   9/30/19   12/31/18 
                 
Cash and Cash Equivalents  $54,666   $12,902   $11,111   $7,433 
Restricted Cash   14,021    6,094    7,056    5,344 
Cash, Cash Equivalents And Restricted Cash  $68,687   $18,996   $18,167   $12,777 

 

Revenue

 

On January 1, 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (ASC 606). For transactions in the scope of ASC 606, we recognize revenue when control of goods or services transfers to the customer, in the amount that we expect to receive for the transfer of goods or provision of services.

 

Rental and related income is generated from lease agreements for our sites and homes. The lease component of these agreements is accounted for under ASC 840 “Leases.” The non-lease components of our lease agreements consist primarily of utility reimbursements, which are accounted for with the site lease as a single lease under ASC 840.

 

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Revenue from sales of manufactured homes is recognized in accordance with the core principle of ASC 606, at the time of closing when control of the home transfers to the customer. After closing of the sale transaction, we generally have no remaining performance obligation.

 

Interest income is primarily from notes receivables for the previous sales of manufactured homes. Interest income on these receivables is accrued based on the unpaid principal balances of the underlying loans on a level yield basis over the life of the loans.

 

Dividend income and gain on sales of marketable securities are from our investments in marketable securities and are presented separately but are not in the scope of ASC 606.

 

Other income primarily consists of brokerage commissions for arranging for the sale of a home by a third party and other miscellaneous income. This income is recognized when the transactions are completed and our performance obligations have been fulfilled.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2019. As of January 1, 2020, we adopted the fair value option for our notes receivable and there was not a material impact. As of September 30, 2020 and 2019, the Company had notes receivable of $41.8 million and $34.7 million, net the fair value adjustment of $0.9 million and $0.7 million, respectively. Notes receivable are presented as a component of Notes and Other Receivables, net on our Consolidated Balance Sheets. These receivables represent balances owed to us for previously completed performance obligations for sales of manufactured homes.

 

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within that year. The Company adopted this standard effective with its financial statements for the quarter ended March 31, 2020, and it did not have a material impact on its fair value disclosures.

 

Other Recent Accounting Pronouncements

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.

 

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NOTE 2 – NET INCOME (LOSS) PER SHARE

 

Basic Net Income (Loss) per Share is calculated by dividing Net Income (Loss) by the weighted average shares outstanding for the period. Diluted Net Income per Share is calculated by dividing Net Income by the weighted average number of common shares outstanding, and when dilutive, the potential net shares that would be issued upon exercise of stock options pursuant to the treasury stock method. In periods with a net loss, the diluted loss per share equals the basic loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive.

 

For the three and nine months ended September 30, 2020, employee stock options to purchase 3.3 million shares of common stock were excluded from the computation of Diluted Net Income (Loss) per Share as their effect would be anti-dilutive. For the three months ended September 30, 2019, common stock equivalents resulting from employee stock options to purchase 1.1 million shares of common stock amounted to 240,000 shares, which were included in the computation of Diluted Net Income (Loss) per Share. For the nine months ended September 30, 2019, common stock equivalents resulting from employee stock options to purchase 1.1 million shares of common stock amounted to 238,000 shares, which were included in the computation of Diluted Net Income (Loss) per Share.

 

NOTE 3 – INVESTMENT PROPERTY AND EQUIPMENT

 

Acquisitions

 

On July 24, 2020, the Company acquired Camelot Woods, located in Altoona, Pennsylvania, for approximately $3.3 million. This all-age community contains a total of 147 developed homesites that are situated on approximately 27 total acres. At the date of acquisition, the average occupancy for this community was approximately 56%.

 

On September 21, 2020, the Company acquired Lake Erie Estates, located in Fredonia, New York, for approximately $4.5 million. This community contains a total of 163 developed homesites that are situated on approximately 21 total acres. At the date of acquisition, the average occupancy for this community was approximately 71%. In conjunction with this acquisition, the Company assumed a mortgage of approximately $2.7 million on this property (See Note 5).

 

These acquisitions have been accounted for utilizing the acquisition method of accounting in accordance with ASC 805, Business Combinations, and accordingly, the results of the acquired assets are included in the statements of income (loss) from the date of acquisition. The following table summarizes the estimated fair value of the assets acquired, including transaction costs of approximately $1.1 million, for the nine months ended September 30, 2020 (in thousands):

 

   At Acquisition
Date
 
Assets Acquired:     
Land  $786 
Depreciable Property   8,162 
Total Assets Acquired  $8,948 

 

See Note 12 for the Unaudited Pro Forma Financial Information relating to these acquisitions.

 

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NOTE 4 – MARKETABLE SECURITIES

 

The Company’s marketable securities consists primarily of marketable common and preferred stock of other REITs with a fair value of $85.2 million as of September 30, 2020, which represents 6.3% of undepreciated assets. The Company generally limits its investment in marketable securities to no more than approximately 15% of its undepreciated assets. The REIT securities portfolio provides the Company with additional liquidity and additional income and serves as a proxy for real estate when more favorable risk adjusted returns are not available.

 

During the nine months ended September 30, 2020, the Company made purchases of $896,000 in marketable securities. Of this amount, the Company made total purchases of 69,000 common shares of Monmouth Real Estate Investment Corporation (“MREIC”), a related REIT, through MREIC’s Dividend Reinvestment and Stock Purchase Plan for a total cost of $839,000 or weighted average cost of $12.13 per share. The Company owned a total of 2.6 million MREIC common shares as of September 30, 2020 at a total cost of $24.8 million and a fair value of $36.6 million.

 

As of September 30, 2020, the Company had total net unrealized losses of $57.2 million in its REIT securities portfolio. For the three and nine months ended September 30, 2020, the Company recorded a $6.7 million and a $31.9 million decrease, respectively, in the fair value of these marketable securities. The Company held eighteen securities that had unrealized losses as of September 30, 2020. The Company normally holds REIT securities long-term and has the ability and intent to hold these securities to recovery.

 

NOTE 5 – LOANS AND MORTGAGES PAYABLE

 

Unsecured Line of Credit

 

On November 29, 2018, the Company entered into a First Amendment to Amended and Restated Credit Agreement (the “Amendment”) to expand and extend its existing unsecured revolving credit facility (the “Facility”). The Facility is syndicated with two banks led by BMO Capital Markets Corp. (“BMO”), as sole lead arranger and sole book runner, with Bank of Montreal as administrative agent, and includes JPMorgan Chase Bank, N.A. (“J.P. Morgan”) as the sole syndication agent. The Amendment provided for an increase from $50 million in available borrowings to $75 million in available borrowings with a $50 million accordion feature, bringing the total potential availability up to $125 million, subject to certain conditions including obtaining commitments from additional lenders. The Amendment also extended the maturity date of the Facility from March 27, 2020 to November 29, 2022, with a one-year extension available at the Company’s option, subject to certain conditions including payment of an extension fee. Availability under the Facility is limited to 60% of the value of the unencumbered communities which the Company has placed in the Facility’s unencumbered asset pool (“Borrowing Base”). The Amendment increased the value of the Borrowing Base communities by reducing the capitalization rate applied to the Net Operating Income (“NOI”) generated by the communities in the Borrowing Base from 7.5% to 7.0%. As of September 30, 2020, the amount outstanding under the Facility was $15 million and the interest rate was 1.66%.

 

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Loans Payable

 

Loans Payable includes unamortized debt issuance costs of $270,000 and $358,000 on September 30, 2020 and December 31, 2019, respectively. The weighted average interest rate was 3.1% and 3.7% on September 30, 2020 and December 31, 2019, respectively, not including the effect of unamortized debt issuance costs. On September 30, 2020, there was zero 0 outstanding on the margin loan. Subsequent to quarter end, the Company drew down approximately $26 million on its margin line (see Note 11).

 

On June 30, 2020, the Company entered into an amended and restated revolving line of credit for the financing of homes, increasing total availability from $15 million to $20 million. Interest was reduced from prime plus 25 basis points to prime with a floor of 3.25%. The amendment also extended the maturity date from June 1, 2020 to June 1, 2022, with a one year extension at the Bank’s option. As of September 30, 2020, $6 million was outstanding on the revolving line of credit at an interest rate of 3.25%.

 

On October 7, 2020, the Company entered into a $20 million line of credit with FirstBank (see Note 11).

 

Mortgages Payable

 

The following is a summary of our mortgages payable as of September 30, 2020 and December 31, 2019 (in thousands):

 

 

   9/30/2020   12/31/2019 
   Amount   Rate   Amount   Rate 
                 
Fixed rate mortgages  $479,124    3.81%  $377,045    4.14%
Unamortized debt issuance costs   (6,748)        (3,387)     
Mortgages, net of unamortized debt issuance costs  $472,376    3.86%  $373,658    4.18%

 

 

As of September 30, 2020 and December 31, 2019, the weighted average loan maturity of mortgages payable was 6.3 years and 6.0 years, respectively.

 

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On August 20, 2020, the Company completed the financing of 28 of its unencumbered communities, containing approximately 4,100 sites, through Wells Fargo Bank, N. A. for total proceeds of approximately $106 million. This Federal National Mortgage Association (Fannie Mae) credit facility has a 10-year maturity with a 30-year amortization schedule. Interest is at a fixed rate of 2.62%.

 

On September 21, 2020, the Company assumed a mortgage loan with a balance of approximately $2.7 million, in conjunction with its acquisition of Lake Erie Estates in Fredonia, New York. The interest rate on this mortgage is fixed at 5.16%. This mortgage matures on July 6, 2025.

 

NOTE 6 - SHAREHOLDERS’ EQUITY

 

Common Stock

 

On September 15, 2020, the Company paid total cash dividends of $7.5 million or $0.18 per share to common shareholders of record as of the close of business on August 15, 2020, of which $654,000 was reinvested in the Dividend Reinvestment and Stock Purchase Plan (“DRIP”). Total dividends paid to our common shareholders for the nine months ended September 30, 2020 amounted to $22.3 million of which $2.3 million was reinvested. On October 1, 2020, the Company declared a dividend of $0.18 per share to be paid December 15, 2020 to common shareholders of record as of the close of business on November 16, 2020.

 

During the nine months ended September 30, 2020, the Company received, including dividends reinvested of $2.3 million, a total of $5.6 million from its DRIP. There were 468,000 new shares issued under the DRIP during this period.

 

On January 15, 2020, the Board of Directors reaffirmed our Common Stock Repurchase Program (the “Repurchase Program”) that authorized us to repurchase up to $25 million in the aggregate of the Company’s common stock. Purchases under the Repurchase Program were permitted to be made using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The size, scope and timing of any purchases were based on business, market and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability. The Repurchase Program did require the Company to acquire any particular amount of common stock and may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. During the first nine months of 2020, the Company repurchased approximately 174,000 shares of common stock at an aggregate cost of $1.8 million, or a weighted average price of $10.50 per share. The last repurchase was made on May 14, 2020.

 

8.0% Series B Cumulative Redeemable Preferred Stock

 

On September 15, 2020, the Company paid $1.9 million in dividends or $0.50 per share for the period from June 1, 2020 through August 31, 2020 to holders of record as of the close of business on August 17, 2020 of our 8.0% Series B Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share (“Series B Preferred Stock”). Dividends on our Series B Preferred Stock shares are cumulative and payable quarterly at an annual rate of $2.00 per share. Total dividends paid to our Series B Preferred Stock shareholders for the nine months ended September 30, 2020 amounted to $5.7 million.

 

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On March 13, 2020, the Board of Directors approved our Series B Preferred Stock Repurchase Program (the “Series B Repurchase Program”) that authorized us to repurchase up to $5 million in the aggregate of the Company’s Series B Preferred Stock. Purchases under the Series B Repurchase Program were permitted to be made using a variety of methods, which may including open market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The size, scope and timing of any purchases were based on business, market and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability. The Series B Repurchase Program did not require the Company to acquire any particular amount of Series B Preferred Stock. During March 2020, the Company repurchased 531 shares of our Series B Preferred Stock for approximately $12,000.

 

On September 11, 2020, the Company issued a notice of redemption for its Series B Preferred Stock, pursuant to which all 3.8 million issued and outstanding shares of Series B Preferred Stock were redeemed on October 20, 2020 (the “Redemption Date”) at a redemption price equal to the $25.00 per share liquidation preference of the Series B Preferred Stock plus accrued and unpaid dividends to, but not including, the Redemption Date in an amount of $0.2722 per share, for a total payment of $25.2722 per share (the “Redemption Price”). As a result of our redemption notice, the Company recognized a preferred share redemption charge of approximately $2.9 million for the nine months ended September 30, 2020, related to the original issuance costs. As of September 30, 2020, as a result of the redemption notice, the Series B Preferred Stock was reclassified out of Shareholders’ Equity and recorded as a liability on the Company’s Consolidated Balance Sheet. See Note 11 for additional detail.

 

6.75% Series C Cumulative Redeemable Preferred Stock

 

On September 15, 2020, the Company paid $4.1 million in dividends or $0.421875 per share for the period from June 1, 2020 through August 31, 2020 to holders of record as of the close of business on August 17, 2020 of our 6.75% Series C Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share (“Series C Preferred Stock”). Dividends on our Series C Preferred Stock shares are cumulative and payable quarterly at an annual rate of $1.6875 per share. Total dividends paid to our Series C Preferred Stock shareholders for the nine months ended September 30, 2020 amounted to $12.4 million.

 

On October 1, 2020, the Company declared a dividend of $0.421875 per share for the period from September 1, 2020 through November 30, 2020 to be paid on December 15, 2020 to Series C Preferred Stock shareholders of record as of the close of business on November 16, 2020.

 

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6.375% Series D Cumulative Redeemable Preferred Stock

 

On September 15, 2020, the Company paid $2.1 million in dividends or $0.3984375 per share for the period from June 1, 2020 through August 31, 2020 to holders of record as of the close of business on August 17, 2020 of our 6.375% Series D Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share (“Series D Preferred Stock”). Dividends on our Series D Preferred Stock shares are cumulative and payable quarterly at an annual rate of $1.59375 per share. Total dividends paid to our Series D Preferred Stock shareholders for the nine months ended September 30, 2020 amounted to $6.2 million.

 

On October 1, 2020, the Company declared a dividend of $0.3984375 per share for the period from September 1, 2020 through November 30, 2020 to be paid on December 15, 2020 to Series D Preferred Stock shareholders of record as of the close of business on November 16, 2020.

 

Common Stock At-The-Market Sales Program

 

On May 14, 2020, the Company filed with the State Department of Assessments and Taxation of the State of Maryland (the “Maryland SDAT”) an amendment to the Company’s charter to increase the Company’s authorized shares of common stock, par value $0.10 per share (“Common Stock”), by 20 million shares. 

 

On June 30, 2020, the Company entered into an Equity Distribution Agreement (“Common ATM Program”) with BMO Capital Markets Corp., B. Riley FBR, Inc., Compass Point Research & Trading, LLC, D.A. Davidson & Co., Janney Montgomery Scott LLC, and J.P. Morgan Securities LLC, as distribution agents (the “Distribution Agents”) under which the Company may offer and sell shares of the Company’s Common Stock, having an aggregate sales price of up to $100 million from time to time through the Distribution Agents. Sales of the shares of Common Stock under the Common ATM Program, if any, will be in “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the NYSE or on any other existing trading market for the Common Stock, as applicable, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. Shares of Common Stock sold under the Common ATM Program are offered pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-238321), filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2020, and declared effective on June 1, 2020 (the “2020 Registration Statement”), and the prospectus dated June 1, 2020 included in the 2020 Registration Statement and the related prospectus supplement dated June 30, 2020. The Company began selling shares under the Common ATM Program on September 17, 2020 and through September 30, 2020, 117,000 shares of Common Stock were sold at a weighted average price of $14.54 per share, generating gross proceeds of $1.7 million and net proceeds of $1.5 million, after offering expenses.

 

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Preferred Stock At-The-Market Sales Program

 

On October 21, 2019, the Company entered into a Preferred Stock At-The-Market Sales Program (“2019 Preferred ATM Program”) with B. Riley FBR, Inc. (“B. Riley”), as distribution agent, under which the Company was permitted to offer and sell shares of the Company’s Series C Preferred Stock and/or Series D Preferred Stock, having an aggregate sales price of up to $100 million. Sales of shares under the 2019 Preferred ATM Program were “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the NYSE, or on any other existing trading market for the Series C Preferred Stock or Series D Preferred Stock, as applicable, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. The Company began selling shares under the 2019 Preferred ATM Program on October 22, 2019 and through June 30, 2020, 3.2 million shares of Series D Preferred Stock were sold under the 2019 Preferred ATM Program at a weighted average price of $25.09 per share, generating gross proceeds of $80.5 million and net proceeds of $79.1 million, after offering expenses. Of these amounts, year to date through June 30, 2020, we sold 2.6 million shares at a weighted average price of $25.06 per share, generating gross proceeds of $64.1 million and net proceeds after offering expenses of $63.1 million. The Company discontinued the sale of shares under the 2019 Preferred ATM Program prior to June 30, 2020.

 

On July 15, 2020, the Company filed with the Maryland SDAT Articles Supplementary reclassifying and designating 3.3 million shares of the Company’s Common Stock as shares of Series D Preferred. Following the filing of the Articles Supplementary, the authorized capital stock of the Company consists of 140.4 million shares of Common Stock, 4.0 million shares of Series B Preferred Stock, 13.8 million shares of Series C Preferred Stock, 9.3 million shares of Series D Preferred Stock and 3 million shares of excess stock, par value $0.10 per share.

 

On July 22, 2020, the Company entered into a new Preferred ATM Stock At-The-Market Sales Program (“New Preferred ATM Program”) with B. Riley, as distribution agent, under which the Company may offer and sell shares of the Company’s Series C Preferred Stock and/or Series D Preferred Stock, having an aggregate sales price of up to $100 million. Sales of shares under the New Preferred ATM Program are “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the NYSE, or on any other existing trading market for the Series C Preferred Stock or Series D Preferred Stock, as applicable, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. Shares of Series C Preferred Stock and/or Series D Preferred Stock sold under the New Preferred ATM Program are offered pursuant to the Company’s 2020 Registration Statement and are sold and issued pursuant to the Company’s prospectus dated June 1, 2020 included in the 2020 Registration Statement and the related prospectus supplement dated July 22, 2020. The New Preferred ATM Program replaced the 2019 Preferred ATM Program. The Company began selling shares under the New Preferred ATM Program on August 11, 2020 and through September 30, 2020, 134,000 shares of Series C Preferred Stock were sold at a weighted average price of $24.96 per share and 213,000 shares of Series D Preferred Stock were sold at a weighted average price of $24.78 per share, generating total gross proceeds of $8.6 million and total net proceeds of $8.3 million, after offering expenses. As of September 30, 2020, $91.4 million in shares of Series C Preferred Stock and/or Series D Preferred Stock remained eligible for sale under the New Preferred ATM Program.

 

NOTE 7 – STOCK BASED COMPENSATION

 

The Company accounts for awards of stock options and restricted stock in accordance with ASC 718-10, Compensation-Stock Compensation. ASC 718-10 requires that compensation cost for all stock awards be calculated and amortized over the service period (generally equal to the vesting period). The compensation cost for stock option grants is determined using option pricing models, intended to estimate the fair value of the awards at the grant date less estimated forfeitures. The compensation expense for restricted stock is recognized based on the fair value of the restricted stock awards less estimated forfeitures. The fair value of restricted stock awards is equal to the fair value of the Company’s stock on the grant date. Compensation costs of $217,000 and $1.1 million have been recognized for the three and nine months ended September 30, 2020, respectively, and $433,000 and $1.5 million have been recognized for the three and nine months ended September 30, 2019, respectively.

 

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On January 8, 2020, the Company awarded a total of 15,000 shares of restricted stock to three employees. The grant date fair value of these restricted stock grants was $233,000. These grants vest ratably over five years.

 

On January 15, 2020, the Company awarded a total of 11,000 shares of common stock to the members of our Board of Directors. The grant date fair value of these awards was $177,000.

 

On January 17, 2020, the Company granted options to purchase 10,000 shares of common stock to one participant in the Company’s Amended and Restated 2013 Incentive Award Plan. The grant date fair value of these options amounted to $16,000. This grant vests ratably over three years.

 

On March 25, 2020, the Company granted options to purchase 690,000 shares of common stock to forty participants in the Company’s Amended and Restated 2013 Incentive Award Plan. The grant date fair value of these options amounted to $653,000. These grants vest ratably over five years. Compensation costs for grants issued to a participant who is of retirement age is recognized at the time of the grant.

 

On May 20, 2020, the Company granted options to purchase 15,000 shares of common stock to two participants in the Company’s Amended and Restated 2013 Incentive Award Plan. The grant date fair value of these options amounted to $17,000. These grants vest ratably over five years.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the nine months ended September 30, 2020 and 2019:

 

 

   2020   2019 
         
Dividend yield   5.33%    5.13% 
Expected volatility   24.57%    24.04% 
Risk-free interest rate   0.89%    2.50% 
Expected lives   10    10 
Estimated forfeitures   0    0 

 

The weighted-average fair value of options granted during the nine months ended September 30, 2020 and 2019 was $0.96 and $1.72 per share, respectively.

 

During the nine months ended September 30, 2020, eight participants exercised options to purchase a total of 59,500 shares of common stock at a weighted-average exercise price of $10.46 per share for total proceeds of $622,000. The aggregate intrinsic value of options exercised was $276,000. During the nine months ended September 30, 2020, options to two employees to purchase a total of 23,000 shares were forfeited or expired.

 

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As of September 30, 2020, there were options outstanding to purchase 3.3 million shares, with an aggregate intrinsic value of $3.4 million. There were 478,000 shares available for grant under the Amended and Restated 2013 Incentive Award Plan.

 

NOTE 8 - FAIR VALUE MEASUREMENTS

 

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company measures certain financial assets and liabilities at fair value on a recurring basis, including marketable securities. The fair value of these financial assets and liabilities was determined using the following inputs at September 30, 2020 and December 31, 2019 (in thousands):

 

   Fair Value Measurements at Reporting Date Using 
       Quoted Prices   Significant     
       In Active   Other   Significant 
       Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
As of September 30, 2020:                    
Marketable Securities - Preferred stock  $2,172   $2,172   $0   $0 
Marketable Securities - Common stock   82,989    82,989         0            0 
Total  $85,161   $85,161   $0   $0 
                     
As of December 31, 2019:                    
Marketable Securities - Preferred stock  $3,516   $3,516   $0   $0 
Marketable Securities - Common stock   112,670    112,670    0    0 
Total  $116,186   $116,186   $0   $0 

 

In addition to the Company’s investments in marketable securities, the Company is required to disclose certain information about the fair values of its other financial instruments, as defined in ASC 825-10, Financial Instruments. Estimates of fair value are made at a specific point in time, based upon, where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. All of the Company’s Marketable Securities have quoted market prices and traded in active markets and are therefore classified in Level 1 of the fair value hierarchy.

 

The fair value of Cash and Cash Equivalents and Notes Receivable approximates their current carrying amounts since all such items are short-term in nature. The fair value of variable rate Loans Payable approximate their current carrying amounts since such amounts payable are at approximately a weighted-average current market rate of interest. As of September 30, 2020, the fair value of Fixed Rate Mortgages Payable amounted to $491.7 million and the carrying value of Fixed Rate Mortgages Payable amounted to $479.1 million.

 

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NOTE 9 – CONTINGENCIES, COMMITMENTS AND OTHER MATTERS

 

From time to time, the Company may be subject to claims and litigation in the ordinary course of business. Management does not believe that any such claims or litigation will have a material adverse effect on the financial position or results of operations.

 

The Company has an agreement with 21st Mortgage Corporation (“21st Mortgage”) under which 21st Mortgage can provide financing for home purchasers in the Company’s communities. The Company does not receive referral fees or other cash compensation under the agreement. If 21st Mortgage makes loans to purchasers and those purchasers default on their loans and 21st Mortgage repossesses the homes securing such loans, the Company has agreed to purchase from 21st Mortgage each such repossessed home for a price equal to 80% to 95% of the amount under each such loan, subject to certain adjustments. This agreement may be terminated by either party with 30 days written notice. As of September 30, 2020, the total loan balance under this agreement was approximately $2.0 million. Additionally, 21st Mortgage previously made loans to purchasers in certain communities we acquired. In conjunction with these acquisitions, the Company has agreed to purchase from 21st Mortgage each repossessed home, if those purchasers default on their loans. The purchase price ranges from 55% to 100% of the amount under each such loan, subject to certain adjustments. As of September 30, 2020, the total loan balance owed to 21st Mortgage with respect to homes in these acquired communities was approximately $2.0 million. Although this agreement is still in effect, this program is not being utilized by the Company’s new customers as a source of financing.

 

S&F entered into a Chattel Loan Origination, Sale and Servicing Agreement (“COP Program”) with Triad Financial Services, effective January 1, 2016. Neither the Company, nor S&F, receive referral fees or other cash compensation under the agreement. Customer loan applications are initially submitted to Triad for consideration by Triad’s portfolio of outside lenders. If a loan application does not meet the criteria for outside financing, the application is then considered for financing under the COP Program. If the loan is approved under the COP Program, then it is originated by Triad, assigned to S&F and then assigned by S&F to the Company. Included in Notes and Other Receivables is approximately $33.2 million of loans that the Company acquired under the COP Program as of September 30, 2020.

 

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash paid for interest during the nine months ended September 30, 2020 and 2019 was $13.5 million and $13.7 million, respectively. Interest cost capitalized to Land Development was $896,000 and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively.

 

During the nine months ended September 30, 2020 and 2019, the Company assumed mortgages totaling $2.7 million and $19.4 million, respectively, for the acquisition of communities.

 

During the nine months ended September 30, 2020 and 2019, the Company had Dividend Reinvestments of $2.3 million and $5.6 million respectively, which required no cash transfers.

 

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NOTE 11 – SUBSEQUENT EVENTS

 

Management has evaluated subsequent events for disclosure and/or recognition in the financial statements through the date that the financial statements were issued.

 

On October 7, 2020, the Company entered into a revolving line of credit with FirstBank secured by rental homes and rental home leases in several of our manufactured home communities. This facility allows for proceeds of $20 million and is expandable to $30 million with an accordion feature. The facility has a maturity date of November 29, 2022, with a one -year extension available at the Company’s option. Interest is payable at prime plus twenty-five basis points with a floor of 3.5%.

 

On October 20, 2020, the Company redeemed all 3.8 million issued and outstanding shares of its 8.0% Series B Preferred Stock at a redemption price of $25.00 per share liquidation preference plus accrued and unpaid dividends to, but not including, the October 20, 2020 redemption date in an amount of $0.2722 per share, for a total payment of $25.2722 per share, or $96.1 million.

 

In conjunction with the Series B Preferred Stock redemption, on October 15, 2020, the Company drew down $30 million on its credit facility. In addition, the Company drew down approximately $26 million on its margin line on October 19, 2020.

 

Since October 1, 2020, the Company sold an additional 583,000 shares of its Series D Preferred Stock at a weighted average price of $24.78 per share through the New Preferred ATM Program, generating gross proceeds of $14.4 million and net proceeds of $14.2 million, after offering expenses.

 

Since October 1, 2020, the Company sold an additional 8,000 shares of its Common Stock at a weighted average price of $15.00 per share, through its Common ATM Program, generating gross proceeds of $119,000 and net proceeds of $117,000, after offering expenses.

 

NOTE 12 – PROFORMA FINANCIAL INFORMATION (UNAUDITED)

 

The following unaudited pro forma condensed financial information reflects the acquisitions during 2019 and through September 30, 2020. This information has been prepared utilizing the historical financial statements of the Company and the effect of additional Revenue and Expenses from the properties acquired during this period assuming that the acquisitions had occurred as of the first day of the applicable period, after giving effect to certain adjustments including: (a) Rental and Related Income; (b) Community Operating Expenses; (c) Interest Expense resulting from the assumed increase in Mortgages and Loans Payable related to the new acquisitions; and (d) Depreciation Expense related to the new acquisitions. The unaudited pro forma condensed financial information is not indicative of the results of operations that would have been achieved had the acquisitions reflected herein been consummated on the dates indicated or that will be achieved in the future (in thousands).

 

   Three Months Ended   Nine months Ended 
   9/30/20   9/30/19   9/30/20   9/30/19 
                 
Rental and Related Income  $36,783   $34,049   $107,410   $100,476 
Community Operating Expenses   16,298    16,053    47,418    47,700 
Net Income (Loss) Attributable
to Common Shareholders
   (12,507)   5,928    (44,440)   7,017 
Net Income (Loss) Attributable
to Common Shareholders
Per Share – Basic and Diluted
  $(0.30)  $0.15   $(1.08)  $0.18 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Impact of COVID-19

 

The following discussion is intended to provide certain information regarding the impact of the COVID-19 pandemic on our business and management’s efforts to respond to those impacts.

 

We continue to closely monitor our operations and government recommendations and have taken steps to make the safety, security and welfare of our employees, their families and our residents a top priority.

 

We have complied with government “stay-at-home” orders and “social distancing” practices. We have implemented remote working arrangements for our non-essential employees. Our IT system and website allow for virtual tours of our homes for sale or rent, online execution of applications and lease agreements, online payment of rent, and other enhancements. With the lifting of shelter-in-place mandates, we are experiencing high demand for our rental homes and our homes for sale. We are also experiencing fewer move-outs. We continue to maintain our communities and deliver essential services to our residents while following social distancing protocols.

 

We had suspended the mailing of rent increase notifications in March and April which delayed these increases. These increases would have been effective May 1, 2020 and June 1, 2020. This affected May’s rental income by approximately $24,000 and June’s rental income by an additional $20,000. We have since resumed our regular rent increase schedule. We had instituted deferred payment plans, as needed, to our residents who have experienced financial hardship related to COVID-19. Less than 100 residents (less than 1%) have executed these payment plans. Although the unemployment benefits and the economic stimulus payments under the Coronavirus Aid, Relief, and Economic Security (CARES) Act are no longer in effect, many states have their own rental assistance programs in place and rent collections have remained at pre-pandemic levels. We have collected 95% of October’s site and home rent compared to 95% at the same time last year. Site and home rental charges for the third quarter are currently over 98% collected.

 

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The significance, extent and duration of the impact of COVID-19 remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time. We will continue to monitor these rapidly evolving developments and respond in the best interests of our employees, residents and shareholders. At this time, we believe that the fallout from COVID-19 will not have a material adverse effect on our operations.

 

Overview

 

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included elsewhere herein and in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

 

The Company is a self-administered, self-managed Real Estate Investment Trust (“REIT”) with headquarters in Freehold, New Jersey. The Company’s primary business is the ownership and operation of manufactured home communities which includes leasing manufactured home spaces on an annual or month-to-month basis to residential manufactured homeowners. The Company also leases homes to residents and, through its taxable REIT subsidiary, UMH Sales and Finance, Inc. (“S&F”), sells and finances the sale of manufactured homes to qualified residents and prospective residents of our communities and for placement on customers’ privately-owned land.

 

As of September 30, 2020, the Company owned and operated 124 manufactured home communities containing approximately 23,400 developed home sites. These communities are located in New Jersey, New York, Ohio, Pennsylvania, Tennessee, Indiana, Michigan and Maryland.

 

The Company earns income from the operation of its manufactured home communities, leasing of manufactured homesites, the rental of manufactured homes, the sale and finance of manufactured homes, the brokering of home sales, and from appreciation in the values of the manufactured home communities and vacant land owned by the Company. The Company also invests in marketable securities of other REITs, which the Company generally limits to no more than approximately 15% of its undepreciated assets. As of September 30, 2020, the securities portfolio represented 6.3% of undepreciated assets.

 

The Company believes that its capital structure, which allows for the ownership of assets using a balanced combination of equity obtained through the issuance of common stock, preferred stock and debt, will enhance shareholder returns as the properties appreciate over time.

 

The Company intends to continue to increase its real estate investments. Our business plan includes acquiring value-add communities and then investing in physical improvements, including adding rental homes onto otherwise vacant sites. This has resulted in increased occupancy rates and improved operating results. For the three months ended September 30, 2020, total income increased 16% from the prior year period and Community Net Operating Income (“NOI”), as defined below, increased 17%. For the nine months ended September 30, 2020, total income increased 11% from the prior year period and Community NOI increased 19%. Same property NOI, which includes communities owned and operated as of January 1, 2019, increased 14% for the nine months ended September 30, 2020 over the prior year period driven by a 320 basis point increase in occupancy to 86.9%. We have been positioning ourselves for future growth and will continue to seek opportunistic investments. There is no assurance that the Company can continue to acquire existing manufactured home communities that meet the requirements of the business plan or that the demand for rental homes will continue in the future.

 

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With the lifting of shelter-in-place mandates, sales of manufactured homes increased 54% and 8% during the three and nine months ended September 30, 2020, respectively, from the prior year periods. Demand for quality affordable housing remains healthy while inventory is scarce. Our property type offers substantial comparative value that should result in increased demand.

 

The macro-economic environment and current housing fundamentals continue to favor home rentals. Rental homes in a manufactured home community allow the resident to obtain the efficiencies of factory-built housing and the amenities of community living for less than the cost of other forms of affordable housing. We continue to see strong demand for rental homes. We have added an additional 684 rental homes during the first nine months of 2020. This brings the total number of rental homes to approximately 8,100 rental homes, or 34.5% of total sites. Occupied rental homes represent approximately 38.7% of total occupied sites at quarter end. Occupancy in rental homes continues to be strong and is at 95.4% as of September 30, 2020. We compare favorably with other types of rental housing, including apartments, and we will continue to allocate capital to rental home purchases, as demand dictates. Although COVID-19 delayed our rental home purchases, we continue to anticipate adding approximately 800 - 900 rental homes in 2020.

 

During the nine months ended September 30, 2020, the Company acquired two all-age communities containing a total of 310 homesites on 48 acres for an aggregate purchase price of approximately $7.8 million.

 

The following is a summary of the communities acquired during the nine months ended September 30, 2020 (in thousands):

 

Community  Date of Acquisition   State  

Number of

Sites

   Purchase Price  

Number of

Acres

   Occupancy at Acquisition 
                         
Camelot Woods   July 24, 2020    PA    147   $3,340    27         56%
                               
Lake Erie Estates   September 21, 2020    NY    163    4,500    21    71%
                               
Total as of September 30, 2020            310   $7,840    48    64%

 

See PART I, Item 1 – Business in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a more complete discussion of the economic and industry-wide factors relevant to the Company and the opportunities and challenges, and risks on which the Company is focused.

 

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Significant Accounting Policies and Estimates

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of Assets and Liabilities, Revenues and Expenses, and related disclosure of contingent Assets and Liabilities at the date of the Company’s Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.

 

On a regular basis, management evaluates our assumptions, judgments and estimates. Management believes there have been no material changes to the items that we disclosed as our significant accounting policies and estimates under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Supplemental Measures

 

In addition to the results reported in accordance with GAAP, management’s discussion and analysis of financial condition and results of operations include certain non-GAAP financial measures that in management’s view of the business we believe are meaningful as they allow the investor the ability to understand key operating details of our business both with and without regard to certain accounting conventions or items that may not always be indicative of recurring annual cash flow of the portfolio. These non-GAAP financial measures as determined and presented by us may not be comparable to related or similarly titled measures reported by other companies, and include Community NOI, Funds from Operations Attributable to Common Shareholders (“FFO”), and Normalized Funds from Operations Attributable to Common Shareholders (“Normalized FFO”).

 

We define Community NOI as rental and related income less community operating expenses such as real estate taxes, repairs and maintenance, community salaries, utilities, insurance and other expenses. We believe that Community NOI is helpful to investors and analysts as a direct measure of the actual operating results of our manufactured home communities, rather than our Company overall. Community NOI should not be considered a substitute for the reported results prepared in accordance with GAAP. Community NOI should not be considered as an alternative to net income (loss) as an indicator of our financial performance, or to cash flows as a measure of liquidity; nor is it indicative of funds available for our cash needs, including our ability to make cash distributions.

 

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The Company’s Community NOI for the three and nine months ended September 30, 2020 and 2019 is calculated as follows (in thousands):

 

   Three Months Ended   Nine Months Ended 
   9/30/20   9/30/19   9/30/20   9/30/19 
                 
Rental and Related Income  $36,358   $32,948   $105,767   $94,980 
Less: Community Operating Expenses   16,245    15,772    47,191    45,886 
Community NOI  $20,113   $17,176   $58,576   $49,094 

 

We assess and measure our overall operating results based upon an industry performance measure referred to as Funds from Operations Attributable to Common Shareholders (“FFO”), which management believes is a useful indicator of our operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT. FFO, as defined by The National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (loss) attributable to common shareholders, as defined by accounting principles generally accepted in the U.S. of America (“U.S. GAAP”), excluding extraordinary items, as defined under U.S. GAAP, gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable real estate assets, and the change in the fair value of marketable securities plus certain non-cash items such as real estate asset depreciation and amortization. Included in the NAREIT FFO White Paper - 2018 Restatement, is an option pertaining to assets incidental to our main business in the calculation of NAREIT FFO to make an election to include or exclude gains and losses on the sale of these assets, such as marketable equity securities and include or exclude mark-to-market changes in the value recognized on these marketable equity securities. In conjunction with the adoption of the FFO White Paper - 2018 Restatement, for all periods presented, we have elected to exclude the change in the fair value of marketable securities from our FFO calculation. NAREIT created FFO as a non-U.S. GAAP supplemental measure of REIT operating performance. We define Normalized Funds from Operations Attributable to Common Shareholders (“Normalized FFO”), as FFO, excluding gains and losses realized on marketable securities investments and certain one-time charges. FFO and Normalized FFO should be considered as supplemental measures of operating performance used by REITs. FFO and Normalized FFO exclude historical cost depreciation as an expense and may facilitate the comparison of REITs which have a different cost basis. However, other REITs may use different methodologies to calculate FFO and Normalized FFO and, accordingly, our FFO and Normalized FFO may not be comparable to all other REITs. The items excluded from FFO and Normalized FFO are significant components in understanding the Company’s financial performance.

 

FFO and Normalized FFO (i) do not represent Cash Flow from Operations as defined by U.S. GAAP; (ii) should not be considered as alternatives to net income (loss) as a measure of operating performance or to cash flows from operating, investing and financing activities; and (iii) are not alternatives to cash flow as a measure of liquidity.

 

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The reconciliation of the Company’s U.S. GAAP Net Income (Loss) to the Company’s FFO and Normalized FFO for the three and nine months ended September 30, 2020 and 2019 are calculated as follows (in thousands):

 

   Three Months Ended   Nine Months Ended 
   9/30/20   9/30/19   9/30/20   9/30/19 
                 
Net Income (Loss) Attributable to Common Shareholders  $(12,747)  $5,622   $(45,350)  $5,999 
Depreciation Expense   10,492    9,390    30,991    27,010 
Loss on Sales of Depreciable Assets   31    27    177    36 
(Increase) Decrease in Fair Value of Marketable Securities   6,739    (9,234)   31,921    (15,478)
FFO Attributable to Common Shareholders   4,515    5,805    17,739    17,567 
                     
Adjustments:                    
Redemption of Preferred Stock   2,871    -0-    2,871    -0- 
Non-Recurring Expenses (1)   -0-    206    -0-    581 
Normalized FFO Attributable to Common Shareholders  $7,386   $6,011   $20,610   $18,148 

 

(1) Consists of utility billing dispute over a prior 10-year period ($375,000), emergency windstorm tree removal expenses in two adjacent communities ($126,000) and costs associated with acquisitions not completed ($80,000) in 2019.

 

The following are the cash flows provided (used) by operating, investing and financing activities for the nine months ended September 30, 2020 and 2019 (in thousands):

 

   Nine Months Ended 
   9/30/20   9/30/19 
         
Operating Activities  $50,341   $25,862 
Investing Activities   (77,644)   (99,618)
Financing Activities   76,994    79,146 

 

Changes In Results Of Operations

 

Rental and Related Income increased 10% from $32.9 million for the three months ended September 30, 2019 to $36.4 million for the three months ended September 30, 2020. Rental and Related Income increased 11% from $95.0 million for the nine months ended September 30, 2019 to $105.8 million for the nine months ended September 30, 2020. These increases were primarily due to the acquisitions made during 2019, as well as increases in rental rates and same property occupancy and additional rental homes. The Company has been raising rental rates by approximately 3% to 5% annually at most communities. Same property occupancy has increased 320 basis points from 83.7% as of September 30, 2019 to 86.9% at quarter-end. Occupied rental homes increased 15% from approximately 6,700 homes at September 30, 2019 to 7,700 homes at September 30, 2020.

 

Community Operating Expenses remained relatively stable increasing 3% from $15.8 million for the three months ended September 30, 2019 to $16.2 million for the three months ended September 30, 2020 and 3% from $45.9 million for the nine months ended September 30, 2019 to $47.2 million for the nine months ended September 30, 2020.

 

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Community NOI increased 17% from $17.2 million for the three months ended September 30, 2019 to $20.1 million for the three months ended September 30, 2020. Community NOI increased 19% from $49.1 million for the nine months ended September 30, 2019 to $58.6 million for the nine months ended September 30, 2020. These increases were primarily due to the acquisitions during 2019 and 2020, and increases in rental rates, occupancy and rental homes. The Company’s Operating Expense Ratio (defined as Community Operating Expenses divided by Rental and Related Income) was 47.5% and 44.7%, excluding non-recurring operating expenses, for the three months ended September 30, 2019 and 2020, respectively. The Company’s Operating Expense Ratio was 47.8% and 44.6%, excluding non-recurring operating expenses, for the nine months ended September 30, 2019 and 2020, respectively. Many recently acquired communities have deferred maintenance requiring higher than normal expenditures in the first few years of ownership. Because most of the community expenses consist of fixed costs, as occupancy rates increase, these expense ratios are expected to continue to improve. Since the Company has the ability to increase its rental rates annually, increasing costs due to inflation and changing prices have generally not had a material effect on revenues and income from continuing operations.

 

Sales of manufactured homes increased 54% from $4.4 million, or 71 homes, for the three months ended September 30, 2019 to $6.8 million, or 108 homes, for the three months ended September 30, 2020. Sales of manufactured homes increased 8% from $13.9 million, or 230 homes, for the nine months ended September 30, 2019 to $15.0 million, or 252 homes, for the nine months ended September 30, 2020. Cost of sales of manufactured homes amounted to $4.7 million and $3.3 million for the three months ended September 30, 2020 and 2019, respectively. Cost of sales of manufactured homes amounted to $10.7 million and $10.1 million for the nine months ended September 30, 2020 and 2019, respectively. The gross profit percentage was 31% and 25% for the three months ended September 30, 2020 and 2019, respectively. The gross profit percentage was 29% and 27% for the nine months ended September 30, 2020 and 2019, respectively. Selling expenses, which includes salaries, commissions, advertising and other miscellaneous expenses, amounted to $1.4 million for both the three months ended September 30, 2020 and 2019. Selling expenses amounted to $3.8 million for both the nine months ended September 30, 2020 and 2019. Income (Loss) from the sales operations (defined as sales of manufactured homes less cost of sales of manufactured homes less selling expenses less interest on the financing of inventory) amounted to income of $643,000 or 10% of total sales and a loss of $316,000 or 7% of total sales for the three months ended September 30, 2020 and 2019, respectively. Income (Loss) from the sales operations amounted to income of $446,000 or 3% of total sales and a loss of $241,000 or 2% of total sales for the nine months ended September 30, 2020 and 2019, respectively. Many of the costs associated with sales, such as salaries, and to an extent, advertising and promotions, are fixed.

 

The National Association of Realtors reported that as of September 2020, sales of existing homes grew 21% from a year ago. Home prices continue their rise as fewer sellers are listing homes and inventories decline. The inherent affordability of our property type becomes more and more apparent, which should result in increased demand. The Company continues to be optimistic about future sales and rental prospects given the fundamental need for affordable housing. The Company believes that sales of new homes produces new rental revenue and is an investment in the upgrading of our communities.

 

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General and Administrative Expenses increased 14% from $2.6 million for the three months ended September 30, 2019 to $2.9 million for the three months ended September 30, 2020. General and Administrative Expenses increased 4% from $7.9 million for the nine months ended September 30, 2019 to $8.3 million for the nine months ended September 30, 2020. These increases were due to an increase in personnel costs, including an increase in the bonus accrual based on FFO metrics and an increase in matching contributions associated with our 401(k) Plan. General and Administrative expenses as a percentage of gross revenue (Total Income plus Interest, Dividend and Other Income) was 6.5% for the three and nine months ended September 30, 2020, respectively, compared to 6.2% and 6.7% for the three and nine months ended September 30, 2019, respectively.

 

Depreciation Expense increased 12% from $9.4 million for the three months ended September 30, 2019 to $10.5 million for the three months ended September 30, 2020. Depreciation Expense increased 15% from $27.0 million for the nine months ended September 30, 2019 to $31.0 million for the nine months ended September 30, 2020. These increases were primarily due to the acquisitions and the increase in rental homes during 2019 and 2020.

 

Interest Income increased 13% from $650,000 for the three months ended September 30, 2019 to $736,000 for the three months ended September 30, 2020. Interest Income increased 20% from $1.8 million for the nine months ended September 30, 2019 to $2.1 million for the nine months ended September 30, 2020. These increases were primarily due to an increase in the average balance of notes receivable from $32.6 million at September 30, 2019 to $36.9 million at September 30, 2020.

 

Dividend Income decreased 36% from $1.9 million for the three months ended September 30, 2019 to $1.2 million for the three months ended September 30, 2020. Dividend Income decreased 22% from $5.7 million for the nine months ended September 30, 2019 to $4.5 million for the nine months ended September 30, 2020. These decreases were due to reduced dividends from our holdings. Dividends received from our marketable securities investments were at a weighted average yield of approximately 5.2% and 6.3%, at September 30, 2020 and 2019, respectively. It is the Company’s intent to hold these marketable securities long-term.

 

Increase (Decrease) in Fair Value of Marketable Securities decreased from an unrealized gain of $9.2 million for the three months ended September 30, 2019 to an unrealized loss of $6.7 million for the three months ended September 30, 2020. Increase (Decrease) in Fair Value of Marketable Securities decreased from an unrealized gain of $15.5 million for the nine months ended September 30, 2019 to an unrealized loss of $31.9 million for the nine months ended September 30, 2020. These decreases were due to the effects of the COVID-19 pandemic on prices in the securities market. As of September 30, 2020, the Company had total net unrealized losses of $57.2 million in its REIT securities portfolio.

 

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Interest Expense increased 3% from $4.4 million for the three months ended September 30, 2019 to $4.5 million for the three months ended September 30, 2020. This increase was primarily due to the new $106 million Fannie Mae credit facility. Interest Expense decreased 1% from $13.3 million for the nine months ended September 30, 2019 to $13.1 million for the nine months ended September 30, 2020. This decrease was primarily due to a decrease in the weighted average interest rate on our mortgages payable from 4.2% at September 30, 2019 to 3.8% at September 30, 2020, not including the effect of unamortized debt issuance costs. This was partially offset by an increase in the weighted average balance of our mortgages payable from approximately $353 million as of September 30, 2019 to approximately $424 million as of September 30, 2020.

 

Changes in Financial Condition

 

Total Investment Property and Equipment increased 6% or $65.0 million during the nine months ended September 30, 2020. The Company added 684 rental homes to its communities. The Company’s occupancy rate on its rental homes portfolio increased 310 basis points and was 95.4% at September 30, 2020 as compared to 92.3% at December 31, 2019.

 

Marketable Securities decreased 27% or $31.0 million during the nine months ended September 30, 2020. This decrease was due to a net decrease in the fair value of $31.9 million and purchases of $896,000.

 

Mortgages Payable, net of unamortized debt issuance costs, increased 26% or $98.7 million during the nine months ended September 30, 2020. This increase was primarily due to new mortgages totaling $108.7 million, including $2.7 million of mortgages assumed in conjunction with acquisitions and amortization expense of $510,000, partially offset by principal repayments of $6.6 million and costs of the new mortgages totaling $3.9 million.

 

Loans Payable, net of unamortized debt issuance costs, decreased 59% or $49.1 million during the nine months ended September 30, 2020. This decrease was due to a decrease of $6.3 million on our revolving lines of credit for the financing of home sales and the purchase of inventory, a decrease of $37.5 million on our margin loan and a decrease of $4 million on our revolving line of credit secured by the Company’s eligible notes receivable.

 

Liquidity and Capital Resources

 

The Company’s focus is on real estate investments, including investment in rental homes. Additionally, the Company invests in marketable debt and equity securities of other REITs. The REIT securities portfolio provides the Company with liquidity and additional income and serves as a proxy for real estate when more favorable risk adjusted returns are not available. The Company generally limits its marketable securities investments to no more than approximately 15% of its undepreciated assets.

 

The Company’s principal liquidity demands have historically been, and are expected to continue to be, distributions to the Company’s shareholders, acquisitions, capital improvements, development and expansions of properties, debt service, purchases of manufactured home inventory and rental homes, financing of manufactured home sales and payments of expenses relating to real estate operations. We anticipate that the liquidity demands of the recent properties acquired will be met by the operations of these acquisitions. The Company’s ability to generate cash adequate to meet these demands is dependent primarily on income from its real estate investments and marketable securities portfolio, the sale of real estate investments and marketable securities, refinancing of mortgage debt, leveraging of real estate investments, availability of bank borrowings, lines of credit, proceeds from the DRIP, and access to the capital markets.

 

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In addition to cash generated through operations, the Company uses a variety of sources to fund its cash needs, including acquisitions. The Company may sell marketable securities from its investment portfolio, borrow on its unsecured credit facility or lines of credit, finance and refinance its properties, and/or raise capital through the DRIP and capital markets, including through the Company’s ATM Programs. In order to provide financial flexibility to opportunistically access the capital markets, the Company has implemented both a Common ATM Program and a New Preferred ATM Program. The Common ATM Program allows the Company to offer and sell shares of the Company’s Common Stock, having an aggregate sales price of up to $100 million from time to time through the Distribution Agents. The New Preferred ATM Program allows the Company to offer and sell shares of the Company’s Series C Preferred Stock and/or Series D Preferred Stock, having an aggregate sales price of up to $100 million from time to time.

 

The Company intends to continue to increase its real estate investments. Our business plan includes acquiring communities that yield in excess of our cost of funds and then investing in physical improvements, including adding rental homes onto otherwise vacant sites. There is no guarantee that any of these additional opportunities will materialize or that the Company will be able to take advantage of such opportunities. The growth of our real estate portfolio depends on the availability of suitable properties which meet the Company’s investment criteria and appropriate financing. Competition in the market areas in which the Company operates is significant. To the extent that funds or appropriate communities are not available, fewer acquisitions will be made.

 

The Company continues to strengthen its capital and liquidity positions. Through our 2019 Preferred ATM Program and our New Preferred ATM Program, the Company sold a total of 134,000 shares of our Series C Preferred Stock and 2.8 million shares of our Series D Preferred Stock generating gross proceeds of $72.6 million and net proceeds after offering expenses of $71.5 million during the nine months ended September 30, 2020. Subsequent to quarter end, the Company sold an additional 583,000 shares of its Series D Preferred Stock at a weighted average price of $24.78 per share under the New Preferred ATM Program, generating gross proceeds of $14.4 million and net proceeds of $14.2 million, after offering expenses.

 

During the nine months ended September 30, 2020, the Company sold 117,000 shares of Common Stock through our Common ATM Program at a weighted average price of $14.54 per share, generating gross proceeds of $1.7 million and net proceeds of $1.5 million, after offering expenses. Subsequent to quarter end, the Company sold an additional 8,000 shares of its Common Stock under the Common ATM Program at a weighted average price of $15.00 per share, generating gross proceeds of $119,000 and net proceeds of $117,000, after offering expenses.

 

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The Company also raised $5.6 million from the issuance of common stock in the DRIP during the nine months ended September 30, 2020, which included Dividend Reinvestments of $2.3 million. Dividends paid on the common stock for the nine months ended September 30, 2020 were $22.3 million, of which $2.3 million were reinvested. Dividends paid on the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock for the nine months ended September 30, 2020 totaled $24.3 million.

 

Net Cash provided by Operating Activities amounted to $50.3 million and $25.9 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the Company had Cash and Cash Equivalents of $54.7 million, Marketable Securities of $85.2 million, $29.4 million available on our revolving lines of credit for the financing of home sales and purchases of inventory and $60 million available on our unsecured credit facility, with an additional $50 million potentially available pursuant to an accordion feature.

 

On October 20, 2020, the Company redeemed all 3.8 million issued and outstanding shares of its Series B Preferred Stock at a redemption price of $25.00 per share liquidation preference plus accrued and unpaid dividends to, but not including, the October 20, 2020 redemption date in an amount of $0.2722 per share, for a total payment of $25.2722 per share, or $96.1 million. The redemption was funded in part with proceeds from our recently completed $106 million financing with Fannie Mae.

 

In conjunction with the Series B Preferred Stock redemption, the Company drew down $30 million on its credit facility. In addition, the Company drew down approximately $24 million on its margin line.

 

The extent to which COVID-19 and related actions impact our operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with any degree of confidence, including the scope, severity, duration and geographies of the outbreak, the actions taken to contain the COVID-19 pandemic or mitigate its impact requested or mandated by governmental authorities or otherwise voluntarily taken by individuals or businesses, the success of governmental actions undertaken to support the economy during the pandemic and the duration and severity of direct and indirect economic effects of the illness and containment measures, among others. As previously discussed, at this time, we believe that the fallout from COVID-19 will not have a material adverse effect on our financial condition.

 

As of September 30, 2020, the Company owned 124 communities, of which 20 were unencumbered. Except for 13 communities in the borrowing base for our unsecured credit facility, these unencumbered communities can be used to raise additional funds. Our marketable securities, unencumbered properties, and lines of credit provide the Company with additional liquidity.

 

As of September 30, 2020, the Company had total assets of $1.1 billion and total liabilities of $629.8 million, including $95 million of our Series B Preferred Stock called for redemption. The Company’s net debt (net of unamortized debt issuance costs and cash and cash equivalents) to total market capitalization as of September 30, 2020 was approximately 31% and the Company’s net debt, less securities to total market capitalization as of September 30, 2020 was approximately 25%. As of September 30, 2020, the Company had no mortgages due within the next 12 months. The Company believes that it has the ability to meet its obligations and to generate funds for new investments.

 

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Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

Cautionary Statement Regarding Forward-Looking Statements

 

Statements contained in this Form 10-Q, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about the Company’s expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not historical facts. Forward-looking statements can be identified by their use of forward-looking words, such as “may,” “will,” “anticipate,” “expect,” “believe,” “intend,” “plan,” “should,” “seek” or comparable terms, or the negative use of those words, but the absence of these words does not necessarily mean that a statement is not forward-looking.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described below and under the headings “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These and other risks, uncertainties and factors could cause our actual results to differ materially from those included in any forward-looking statements we make. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results to differ materially from our expectations include, among others:

 

  changes in the real estate market conditions and general economic conditions;
  risks and uncertainties related to the ongoing global outbreak of the novel coronavirus (COVID-19);
  the inherent risks associated with owning real estate, including local real estate market conditions, governing laws and regulations affecting manufactured housing communities and illiquidity of real estate investments;
  increased competition in the geographic areas in which we own and operate manufactured housing communities;

 

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  our ability to continue to identify, negotiate and acquire manufactured housing communities and/or vacant land which may be developed into manufactured housing communities on terms favorable to us;
  our ability to maintain rental rates and occupancy levels;
  changes in market rates of interest;
  our ability to repay debt financing obligations;
  our ability to refinance amounts outstanding under our credit facilities at maturity on terms favorable to us;
  our ability to comply with certain debt covenants;
  our ability to integrate acquired properties and operations into existing operations;
  the availability of other debt and equity financing alternatives;
  continued ability to access the debt or equity markets;
  the loss of any member of our management team;
  our ability to maintain internal controls and processes to ensure all transactions are accounted for properly, all relevant disclosures and filings are made in a timely manner in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected;
  the ability of manufactured home buyers to obtain financing;
  the level of repossessions by manufactured home lenders;
  market conditions affecting our investment securities;
  changes in federal or state tax rules or regulations that could have adverse tax consequences;
  our ability to qualify as a real estate investment trust for federal income tax purposes; and,
  those risks and uncertainties referenced under the heading “Risk Factors” contained in this Form 10-Q and the Company’s other filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2019.

 

You should not place undue reliance on these forward-looking statements, as events described or implied in such statements may not occur. The forward-looking statements contained in this Form 10-Q speak only as of the date hereof and the Company expressly disclaims any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes to information required regarding quantitative and qualitative disclosures about market risk from the end of the preceding year to the date of this Quarterly Report on Form 10-Q.

 

Item 4. Controls and Procedures

 

The Company’s President and Chief Executive Officer (principal executive officer) and the Company’s Vice President and Chief Financial Officer (principal financial and accounting officer), with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s President and Chief Executive Officer and Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of such period.

 

Changes In Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarterly period ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.