UMH Properties, Inc. (UMH) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the UMH Properties Third Quarter 2015 Earnings Conference Call. All participants will be in a listen-only-mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. It is now my pleasure to introduce your host, Ms. Nelli Madden, Director of Investor Relations. Thank you, Ms. Madden. You may now begin.

Thank you very much, operator. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited quarterly supplemental information presentation. This supplemental information presentation along with the 10-Q are available on our website at umh.com. I would like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in our third quarter 2015 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements. Having said that, I'd like to introduce management with us today. Eugene Landy, Chairman; Samuel Landy, President and Chief Executive Officer; and Anna Chew, Vice President and Chief Financial Officer. It is now my pleasure to turn the call over to UMH's President and Chief Executive Officer, Samuel Landy.

Thank you very much, Nelli. Good morning, everyone and thank you for joining us. We are pleased to report our results for the third quarter ended September 30, 2015. Continuing with the positive trends set in the first two quarters, normalized FFO for the quarter was $0.15 per diluted share, as compared to $0.12 per diluted share a year ago. This represents a 25% increase. For the nine months, normalized FFO increased 21.2%. We have continued to execute our growth strategy of using debt, preferred stock, and equity raised through our dividend reinvestment plan to purchase well located communities in our target markets. During the first three quarters, we acquired seven manufactured home communities for an aggregate cost of $45.1 million. Subsequent to quarter end, we acquired an additional three communities for a purchase price of $36.1 million. With the communities acquired subsequent to quarter end, we have continued to generate substantial portfolio growth of 18% year to date. Our portfolio is now comprised of 98 communities with 17,800 developed home sites located throughout seven states. We continue to make progress on our business model of purchasing communities in strong geographic areas below replacement cost, upgrading them, and adding rental units. We continue to see strong demand for 1,000 square foot, three-bedroom, two-bath homes at $700 per month. The manufactured home in a land leased community is the ideal form of affordable rental housing. Communities of 200 or more lots provide efficiency in the management of rental housing. The cost savings and the creation and management of rental homes in a manufactured home community are considerable when compared to apartments or single family homes for rent. In the Marcellus and Utica shale regions of Pennsylvania and Ohio, the recent drop in oil prices have reduced shale drilling for the moment. However, the local economies in these regions continue to grow. Pipeline and cracker plant construction projects continue to move forward. Manufacturing is beginning to come back in these areas with Ford Motor Company moving production of certain product lines from Mexico to Ohio. In Elkhart, Indiana the recreational vehicle industry is nearing record production. In Nashville, Tennessee, the economy built around technology, and manufacturing, and business services is strong and job growth is outpacing population growth. We have achieved 98% occupancy at Holiday Village, a Nashville community we purchased in 2013, which had approximately 20% vacancy at the time of purchase. Our same property results have continued to improve, substantially increasing the value of our communities. Following the positive results achieved in our first two quarters, same property occupancy rose 70 basis points over the prior year period. Revenue increased 10% while expenses only increased 1.5%, resulting in an increase in the same property NOI of 18.5% for the third quarter. For the nine months, same property NOI increased 18%. Our strong year-over-year same property NOI growth continues to validate our business model. We anticipate adding an additional $100 million in communities over the next few years, which will further enhance long-term value for our shareholders. Total community NOI increased 24% for the quarter and 23% for the nine months of 2015, as compared to the same periods a year ago. In addition to community acquisitions, the strength of this growth has been fueled by our rental home operations. There has been a cultural shift towards renting. Favorable demographic trends, an improving economy, and strength in the job market have driven the increase in demand. Household formations have ramped up during 2015. While both owner and rental sectors benefit from the growth in households, the declining home ownership rate indicates that the rental sector is benefiting more from this trend. Millennials have also played a role in the shift toward renting. Employment for younger adults has recently reaccelerated and the number of young adults living at home has recently declined for the first time in seven years. The demand for our rental homes continues to increase. Over the first three quarters of 2015, we added an additional 700 homes to our rental inventory. At quarter end, we owned approximately 3,300 rental homes, representing 20.3% of our total home sites versus 2,300 rental homes at the end of the prior year period, representing a 43.5% increase in rental homes. Rental home occupancy continues to be strong and is currently at 94.1%. Occupied rental homes now represent 23.4% of total occupied sites as compared to 17.7% of total occupied sites at the end of the prior year period. The increase in rental units is a key contributing factor in our 80 basis point improvement in same-store occupancy. Our overall occupancy rate is 81.7%, down 50 basis points from the prior year period. The reason for this decline is our large recent acquisition activity, which had a weighted average occupancy rate of only 70%. These communities were acquired at a going in cap rate of approximately 7%. As we improve these communities and drive occupancy growth, our returns will be substantially higher. Turning to sales, our home sales have increased 24% quarter-over-quarter. Total homes sold were 45 homes for the third quarter of 2015 compared to 35 homes for the third quarter of 2014. For the nine months ended September 30, 2015, total homes sold were 101 homes compared to 95 homes sold in the prior year period. The conventional single family housing market continues to gradually strengthen. Nationally, home prices have risen at a 4% to 5% annual rate, twice as fast as reported inflation. As home prices increase, the affordability gap widens and the benefits of manufactured homes become clear. And now, Anna will provide you with greater detail on our results for the quarter.

Thank you, Sam. Core funds from operations or core FFO were $4.1 million or $0.15 per diluted share for the third quarter of 2015, compared to $2.9 million or $0.13 per diluted share for the third quarter of 2014. Normalized FFO, which excludes realized gains on the sale of securities and other non-recurring items was $4 million or $0.15 per diluted share for the third quarter of 2015 compared to $2.8 million or $0.12 per diluted share a year ago. Normalized FFO was $10.4 million or $0.40 per diluted share for the nine months compared to $7.3 million or $0.33 per diluted share a year ago, representing a 21.2% increase on a per share basis. Rental and related income for the quarter was $19 million compared to $16.4 million a year ago, representing an increase of 16%, primarily due to the acquisitions made since the prior year period, increased occupancy rates and the additional of rental homes. As Sam mentioned, at quarter end, we had 3,300 rental homes as compared to 2,300 a year ago, representing an increase of 43.5%. Same property NOI increased 18.5% this quarter over the prior year period, driven by increases in rental revenue and occupancy gains. Total community operating expenses for the quarter were 49.2% of rental and related income, representing a 340 basis point improvement from the 52.6% expense ratio for the prior year period. For the nine months, our expense ratio was 50.4% compared to 53.7% for the prior year period. As we noted in the past, our expense ratio will continue to improve as we upgrade and integrate our acquisitions. Total community NOI amounted to $9.6 million for the quarter compared to $7.7 million a year ago, representing a 24% increase, as Sam mentioned. Our loss from the sales operation, including interest expense, was $400,000 for the quarter compared to $500,000 a year ago. As of quarter end, our capital structure consisted of approximately $335 million in debt, of which $266 million was community level mortgage debt and $69 million were loans payable. We also had a total of $92 million in Series A perpetual preferred equity at quarter end. Our preferred stock, combined with an equity market capitalization of $249 million and our $335 million in debt, results in a total market capitalization of approximately $676 million at quarter end. Subsequent to quarter end, we issued 1.8 million shares of 8% Series B cumulative redeemable perpetual preferred stock at a purchase price of $25 per share. As a result, the Company received net proceeds of approximately $43.3 million. This transaction positions us well to continue to execute our growth strategy, including the purchase of additional communities and rental homes. This successful transaction will enable us to issue fewer common shares going forward. From a credit standpoint, our net debt to total market capitalization was 48%. Our net debt less securities to total market capitalization was 39%. Our fixed charge coverage was 1.7 times. Our net debt to EBITDA was 9.5 times and our net debt less securities to EBITDA was 7.7 times. Although these leverage ratios are higher than we would like, given our current vacancy factor of approximately 20%, we have the operational leverage in our current portfolio to improve our credit metrics substantially. From a liquidity standpoint, we ended the quarter with $8 million in cash and cash equivalence, and $5 million in availability under our credit facility, with an additional $15 million potentially available pursuant to an accordion feature. We also had $15 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory. In addition, we held $61 million in marketable REIT securities, representing 9.3% of our undepreciated assets. This portfolio is encumbered by $16 million in margin loans at 2% interest. Generally, 50% of the market value of REIT securities may be borrowed on margin. Over the past year, we have aggressively taken advantage of historically low, long-term mortgage rates. During the nine months ended September 30, 2015 we have obtained $101 million of new mortgage loans, $85 million net after the retirement of existing mortgages. These loans were at a weighted average interest rate of 4%. This has reduced our weighted average interest rate on our mortgage debt from 4.8% at September 30, 2014 to 4.5% currently while increasing the weighted average maturity from 5.5 years to 6.6 years. In conjunction with our acquisitions subsequent to quarter end, we completed the financing of an additional five communities for total proceeds of approximately $39 million at a weighted average interest rate of 4%. And now, let me turn it over to Gene before we open it up for questions.

Thank you, Anna. We are very proud of the progress UMH has achieved. Normalized FFO per share is up 21% from a year ago. Our portfolio has grown by 18%. We have increased the number of our rental homes by 43%. We have reduced the weighted average interest rate on our mortgage debt to 4.5%. These accomplishments will result in continued per share earnings accretion as we benefit from their full run rate effect. Our recent preferred share issuance and our debt refinancing through Freddie Mac will allow us to continue the substantial growth we have achieved. Housing fundamentals remain strong. The need for quality affordable housing continues to grow. Given all of these positive trends, management will recommend to the Board of Directors the continuation of our current $0.18 a quarter or $0.72 annual per share cash distribution. In 2014, rent and related revenue was $64 million. This year, we will exceed $72 million and next year we anticipate more than $84 million. As already noted, our margins between revenue and expenses have improved and will continue to improve given our occupancy growth trajectory. Housing costs account for 30% to 50% of the income of our citizens. One way to reduce housing costs is through automated factory construction of homes. Another way is to reduce borrowing costs by using government guarantees of home loans. The GSEs are in the process of finalizing rules that should include a duty to serve the manufactured housing sector. The new program, if adopted, would be a very favorable development for our industry. UMH's mission is to provide affordable housing to a growing US population that is in need of new housing. UMH Properties is proud to be part of the manufactured housing industry. We will now be happy to take questions.

We'll now begin the question and answer session. [Operator Instructions] And our first question comes from Brian Hollenden of Sidoti.

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

Good morning, Brian.

Can you talk about rent received from your owned rental homes in the quarter, excluding lot rent, and how that rent should ramp up moving forward with your mix of rented homes is increasing?

Sure, we added something to the supplemental on the financials that shows the number of rentals in each community and what they're rented for. I don't have that in front of me, but if you look on the supplemental, that will be there. But the rental homes - what continues is we purchase and set up the house for $40,000 and it collects approximately $8,000 per year in rent. And we're maintaining 94% rental occupancy and we have 98 communities, and that allows us to each week evaluate how demand is in each community for rental units and add rental units where necessary. So a lot of these communities were purchased with existing vacant lots at a cap rate. The cost to build a vacant site is estimated by Sun Communities at $70,000 a site. But when we purchase the communities at a cap rate, you could almost say you didn't pay anything for the vacant sites. So when you add the house for $40,000 and you collect 20% gross revenue that's - we expect to net about 15%. Each site does have a value, but when you purchase them by a cap rate, in effect you've really got the vacant sites for nothing. And when you add the rental unit, you increase the revenue and you increase the net income.

Coming back, though to the question, we want to add 500 units. We've upped the budget to 700 units, and if you understand the process, the homes are ordered, they are delivered, they are set up, they are made available for rental and they are rented. And we have in the pipeline about 200 units that are in the pipeline paid for and each month, they go a little further down the pipeline for the ultimate objective of getting the homes rented. So we're very optimistic about increasing the number of rentals for 2015 and 2016. And we're talking about not only putting them in, but having them fully rented.

And I just wanted to add that the average rent, including the site rent, is a little over $700 for the whole portfolio. And of course, in New Jersey it's a little higher at around $825, $830 a month. And in - I guess our lowest is probably in Ohio, which is about a little over - it's around $650 a month.

And the reason we do so well is a three bedroom, two bath apartment rents in most areas for $1,200 to $1,400 a month. And as Sam pointed out, we're renting for $700, maybe $750 a month.

Thanks. And if I could just ask one follow-up to that, the number of rentals added in the quarter was 415 units. How many of those were replacement homes and how many were net new earning assets in terms of receiving both the lot rent and living rent?

I'm not sure they are replacement homes. All these homes that are put in are new homes. Now in the business we're in, we lose existing homes sometimes through eviction, sometimes they're moved out, sometimes they're old and obsolete, particularly with some of the parks we bought that had a number of homes that were older, metal homes that we really didn't want in the park. So we have a net number how we move ahead, and if we put in 500 homes, we don't move ahead 500 homes because we have offsetting factors. But they're two different issues, they have very little relation to each other. The rental program is working perfectly and we're hoping to upgrade our parks over two, three, four years and gradually get out of the park the metal 40-year old homes. And that's a process we don't know how quickly that will occur. As the market tightens for housing, fewer homes will go out. But with some of the parks we've bought, we did see substantial move outs and that caused us not to go ahead as fast as we would. But again, it's one factor offsetting the other. The rental program is working perfectly.

The grand total is - the occupancy increase for lots from January 1 to date is we're up 75 occupied units. And then if you figure how many rentals we add, you can figure that the rest was obsolescence of homes. But that's what we've always said that with the older communities, you have 2% obsolescence. And with the communities we acquired, a lot of them had five years of deferred home removal. So the way we upgrade communities is removing a number of homes that shouldn't be in there and when the grand total is we're up 75 units, there's about three communities that are down 10 units. And those communities were all recent acquisitions that we just had to remove homes that didn't meet our standards.

Also, just to reiterate. What the rental program is doing, even though that we added about 400 in this quarter, our occupancy of rental homes remains at around 94%. So it's not the people who are in the rental homes. It's not replacing rental homes that is causing the small drop. As a matter of fact, the occupancy of the rental homes remains strong and has enhanced the total occupancy of the communities.

Thank you. That's helpful. And just if I could ask one last question, monthly rent per site was up 6% year-over-year. How much of that was related to lot rent increases compared to the mix shift?

All of the communities, virtually all, are receiving a 4% increase on lot rent. And if you have a rental home they're receiving a 4% increase on the lot rent portion, which is about 50% of the total. So if they're paying 800, 400 is lot rent and they've received a 4% increase, which is $16. They're not receiving a total 4% increase on the total rent. But they're receiving 4% on the lot rent as is every community we own.

Thank you.

[Operator Instructions] And we have a follow-up from Brian Hollenden.

Yes, hi. So just switching up a little bit, can you talk about the decision to raise the 8% perpetual preferred stock over refinancing older communities with fixed lower cost mortgage debt?

Well, we very much believe in preferred stock. You must understand that debt is much cheaper than preferred stock, but preferred stock is much cheaper in the long run than equity. And so we've put in the $45 million in preferred to maintain an exceptionally strong balance sheet and an exceptionally strong cash position. But the ultimate future of the company, and we mentioned this on the last call, the Freddie Mac program is a major step forward for our entire industry. If you take our 17,000 sites and each of the parks, we have 98 parks and we study the park-by-park figures, the park-by-park figures is almost universally moving ahead. So the value of our parks are going up and if the value of your parks are going up, every $10 million they go up at a 7% cap rate is $150 million in value. And if you have in place a Freddie Mac program then you can borrow 75% with a 33 year amortization that is currently at 4%, you have the ability to borrow an additional $100 million. So the long-term future of the company, we will be able to borrow substantial amounts of money on a 17,000 site portfolio and we hope to get it up to 20,000 site portfolio. So we are going to concentrate on Freddie Mac long-term debt. But in the interim, we were in the position where we bought $68 million in parks and we put in 700 new rental units at a cost of $28 million. So we spent approximately $100 million to move this company ahead, and ultimately when we do our three year, four year study, we will have no problem at all raising $100 million to fund park acquisitions and rentals, but it's a timing factor. So we decided to go ahead with the preferred stock to put us in a strong liquidity position so we can get to our ultimate goals.

Thanks. And if I may just ask one further question. You mentioned a going in cap rate of 7% on the properties you were acquiring with approximately 70% occupancy. How do you think about the pro forma cap rate as you add rentals to the empty site?

Sure, okay. So first of all, these acquisitions, which we're happy with, a lot of them, they're in Elkhart, Indiana and the Ohio region. And when we look at the top five revenue increasing communities that UMH currently owns, they're in Ohio, one in Indiana, and one in Tennessee. Elkhart, Indiana where we did a bunch of these acquisitions is written up for the strength of their economy and their employment growth. So as we add each rental unit, that increases the gross for that unit 20% with a net of 15%. So when we're buying these things at the 7% cap rate, we currently have 3,750 vacant sites. With 700 new rental units a year, it's only a little over 4.5 years we could have virtually 100% occupancy with rental units. So it's going to come to the bottom line. When we look at communities we already acquired, which the best example is one in Tennessee, Weatherly Estates, where we bought it at an 8% cap, only 64% occupied and got it up to 100% occupancy, and the earnings go way up when that occurs. And that's what we expect to happen with each of these communities. The 7% cap is going in but we - to us, the vacant sites are how we're going to grow the income, grow the net and that's what adds a lot of excitement to it.

Thank you for taking my questions.

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

Good morning. Thank you. Just curious, Gene or Sam, if you go to the Board with your recommendation regarding the dividend, how are you going to articulate your strategy for shoring up the current shortfall. And how long do you think it will take to close that gap?

At the present rate, the numbers are amazing. We've gone from $64 million gross in 2014 to $72 million, $74 million in 2015 and we're projecting $85 million in 2016 and 2017 we'll continue to see increases. So that the - we earned $0.15 last quarter. So you're $0.03 short. So you're $0.12 short on the 26 million shares. So you're short about $3 million. We see no problem at all in gradually eliminating it. I can't give you a fixed time schedule but we're hoping each quarter that we bite into this and we get the earnings up, and we're very, very pleased with the top line and we see no reason why we can't run this company for 50% expense factor, and maybe as low as 48% expense factor. And so we're very optimistic that you're going to see an improved bottom line. But we're more certain of the top line than the bottom line until we actually operate the parks.

But I think - I look at this earnings call as a historic call for UMH because we've been promising that we would get the expense ratio under 50% and it's now under 50%. Its 49 point something percent. As we continue to add revenue through the rental units, we're going to continue to improve that ratio. The $3 million shortfall is really nothing when you remember that we've accumulated 17,800 sites, which people say replacement costs is $70,000 a site. It's hard to pay less than $40,000 a site to buy communities. And so if the value of these sites goes up 4% and you look at our number of shares, and you look at the asset base, and we acquired the communities with preferred stock and debt, the appreciation, the income from the appreciation is more than the current FFO. The FFO is - well, the dividend is $0.72. The appreciation could be $1 per share. So covering the dividend through refinancing, et cetera, when it's not a problem at all.

The current shortfall is far greater than $3 million. I mean that's before talking about the preferred dividends?

No, if we earn $0.15, you've got to earn $0.18. It's $0.03 a share, $0.12 times the number of shares is based on last quarter. Now, if you're looking the earlier quarters the deficit was higher. I think at one of these conference calls, I estimated the deficit at $5 million. I'm telling you the deficit is substantially less than $5 million today and shrinking. So we watch every month to see how the parks are doing. It's fundamentally a question of what is the housing market doing. Everyone says the housing market is strong. What's the rental market doing? That's strong. Apartment rents are going up 5% a year. We know that's an accurate number because they're owned by public companies. Home costs are going up, home values are going up 6%. So our 4% number on rent increases looks more than achievable. And basically, you have 3,000 vacancies, which is $5,000 times 3,000 is $15 million. And I won't say it's a lot of work to get the deficit down and to get the earnings up to $0.70. But you've got a $15 million top line. And the history of manufactured housing and affordable housing is that these parks are full. It's only in recent years we've had this situation where we've had 20% vacancies in it. And my prediction is we're going to go back to an era in which affordable housing, manufactured home communities will be absolutely full, 98%, 100% occupancy. And so UMH has a tremendous opportunity to fill 3,000 sites. So if you want to evaluate our dividend paying ability that's what you got to look at. And we're in a market where we're putting rentals in as fast as we can get them and set them up.

Thank you.

And now we have a question from Tony Gleason of Neuberger.

Hi, good morning folks. Thanks for taking my question. Actually, I have a few questions here. What percent do you see the rental housing becoming? I know you mentioned it's up from 17 to 23. Where do you think that's headed and maybe explain a little bit more your thinking on that?

First, so my father started the company in the 1960s. And whenever you were trying to sell homes, the issue has always been did the buyer have the down payment and did they qualify. And the government regulation today has made that a much harder issue than it ever was. On top of that, society's changed so more people rent than purchase. And we've looked at it, and I go through communities all the time. You cannot tell the difference between a person renting a house and a person who owns the house. There's no additional receivable problem. We're able to transfer residence. It's even easier than a repossession. If you were doing a repossession of a finance sale versus switching from one rental tenant to another, it's much easier to switch the rental. So if you look at it and you say, okay, United has 3,622 rentals today and 3,750 vacant lots, if we added a rental to every vacant site, you'd be up 7,372 rentals, which would be 41% of the total sites. And it used to be people frowned upon your percentage of rentals, but Freddie Mac has now granted waivers to good operators like UMH so it doesn't matter how many rentals you have. And I would argue that if you look at a manufactured home community, there's communities that are multi-section, 55 and older communities that they're pretty much meant to be resident own homes where they pay site rent. But if you look at a workforce housing community where it's predominantly single section homes, 14 by 70 or 16 by 70, that is the perfect rental community. And I say that we have a better product than garden apartments or any other apartments. And nobody has done a strictly 200 space rental community, but there's no reason not to do it. Our homes will last as long as any apartments, but centralized office managing the rental units. I think it's going to, in the future years, be recognized as the best way to build rental housing is build a manufactured home community with manufactured homes. Our cost advantages are phenomenal. You want to build 1,000 square foot apartment, its $250,000. If you say it costs $70,000 to build a lot plus $40,000 for the house, its $110,000. Nobody can compete with us on rental housing. And then when you look at the fact that UMH is spread out into 98 different markets, and we could look at each market each day and determine where to add rental units, I think it's the best business we've ever seen and we should just keep adding all the rentals we need to add.

I'd just add one thing. We also follow what our competitors are doing. We may not do exactly what they're doing but we certainly follow them and we're very pleased with the Sun Communities report. And we see that they're looking into creating a finance company and developing the capability to sell off the rental units. And we'll watch how they do it, and if they can originate a profitable way of selling rental units instead of owning rental units, we'll keep that option open. But at the present time, Sam is convinced and it looks like the numbers bear him out, that rentals are the way to go for the time being.

So I know it wouldn't be possible to fill all 3,000 sites with rental properties, are you - do you have a governor on what percent you'd like it to be or would you be happy in a couple years if it was at 40% of the portfolio?

Well, again, you can't predict it. We're told that in the next three weeks, they're going to decide - the GSEs are going to decide whether they put in place for this year a program that will allow us to finance manufactured homes, which may have a significant effect on our ability to sell homes. So we're watching that. But when we started the Company, we preferred no rentals and all home ownership. Now, the other reason you can't tell, the housing market is getting better, not worse. Even though you're building 1.1 million, 1.2 million homes, what are you building? You're building, as Sam pointed out, $300,000 apartments and you're building high end homes. The affordable part of the housing market is not doing anywhere near as well as the high end of it. And so we are developing a shortage of affordable housing in this country. The population goes ahead 3 million, 3.5 million and with obsolescence and units get to being taken out, the experts imagine we need 1.5 million homes a year. In any event, the housing shortage is growing, and as the housing shortage grows and supply is less than demand, demand exceeds supply, we will have our options open as to whether we do rentals or sales. The main thing is that the country grow ahead with the - so that people can afford housing and the population and demographics, which are more precise, continue to show 3 million, 3.5 million people, 1 million, 2 million, 3 households. There's great prospects for UMH and we don't have to plan how many rentals or how many sales. We just have to see that there's a need for our product.

Well, let me - thank you for that. Let me follow-up on that. As you think about it, capital is a limited valuable resource, capital is. Which do you think is more accretive to earnings, a dollar put into rental units or a dollar put into new communities?

Well, let me answer it this way. Home sales remain very weak on the low end. If you sold $1 million worth of houses, we would net $100,000. And if we sold $1 million worth of houses, you're only talking about 10 to 14 homes. But right now, it's very hard to sell those houses. But the vacant site, when you own that community, you're correct. You're getting the appreciation of the vacant site. You're potentially getting that sales income or you're potentially getting the rental income. So what you're saying is that the appreciation and the value of the site is very great, and we agree with that 100%. But I think that people undercut and lose sight of the value of the rental unit. I wouldn't put a rental unit in somebody else's community for $40,000. If I was setting up this house in somebody else's community or selling it to somebody, you'd sell it for $65,000 to $70,000. So when we add 100 rental units, we're basically creating $3 million in value for the Company. And that earns money immediately, which increases the value of the community. The way - the reality of the way things are today, if you bought these communities at 7% caps with vacancies and did not rent homes, you really wouldn't have any way to increase the income and increase the net. Because until they resolve the issue of financing for the homebuyer, there's just not adequate sales to fill the communities. But we can rent 700 to 800 homes per year no problem, and when you're grossing 20% and I don't know exactly what the net is, but I think it's going to be around 15%. That's a pretty good return. The communities may in fact do even better, but that's a pretty good return.

But it's one business model. We…

Right…

Vacancies, we put in the rental units. We build up the income and we refinance for the park through Freddie Mac at a 4% and the value of the park goes up substantially. And it's not only a theoretical model, it's working in practice.

Okay. Appreciate that. It sounds like the communities, to add a rental unit, though, in the short run, is a more profitable adventure or accretive to earnings than buying a park that might add longer term value. But the new rental unit sounds like a more accretive activity for a dollar invested.

No question about it, particularly if you look at some of the parks we bought that required a lot of work, where we've looked at the year-end numbers and you'd have a 70% expense factor, which we knew was not realistic, but was the result of deferred maintenance, having to take out the junk homes, clean up lots. So there is a period where you suffer when you buy some of the older parks and - but in the long run, the beauty of the manufactured housing industry is that we own parks that I built in 1969 and we have new homes sitting on them. And we have rehabilitated the housing there, didn't need any government subsides, did it very, very profitably. Manufactured home communities have the inherent ability to renew themselves and that's a wonderful attribute.

Just one last sort of comment here. I know the dividend coverage issue is something that is on investors' minds. And I do appreciate that you brought your expense ratio down under 50%. So that's a monumental call. The best - the next super monumental call will be when you are earning the dividend. And I know that, Gene, you're very dismissive of the fact that it's only $3 million and the dividend power of the firm is much greater, et cetera, et cetera. But I guess I would turn that on its side and say if it's such a small amount of money and not a big deal, why not just move to earning the dividend? Because I think many investors are not interested in a company that is not earning its dividend. And it's simply logic that the risk of a dividend cut is higher when a company is not earning the dividend. So I know you're dismissive of investors' concerns about that. So if it's such a small deal and we shouldn't worry about it, why not just take care of business and focus on earning the dividend and then continuing on from that platform…

I don't know what you mean by dismissive. The numbers are that we're going to go from $64 million, $72 million, $85 million, and hopefully $100 million. And I look at those numbers and I look at my projected expense ratios, and I see that I will have no problem paying the dividend. Now, I don't know what you want us to do. We're doing great. Things are working well and you're worried about the fact that the dividend isn't covered. I'm not dismissive of it. We're sorry it isn't covered and when we announced the dividend and we put out a 10-Q, we always put a line in there. So people know that we were $5 million short. We're $2.5 million short. But we're not dismissive of it. We're just very, very optimistic that the earnings are going up and we'll have the dividend covered. But covering the dividend at $0.72 a share is, again, just a short-term view. Why don't you project out three, four, five years what this company is going to be worth if we're grossing more than $100 million and netting more than $50 million on our parks. What Sam keeps pointing out is these parks are going to be worth a fortune. You're talking about hundreds of millions and you want me to lose sleep nights over $2.5 million. I'm sorry, I'm not going to lose sleep over that.

No, I'm not losing sleep over it. I just merely pointed out that if the stock were at 12 rather than 9.85, that the ability to grow the Company by issuing stock would be a lot easier instead of issuing - planning to issue $100 million in new common over the next several years with the stock at 10, you would only have to issue 20% less stock, which would be more accretive to the value of the enterprise than continuing to issue stock at below the net asset value. So I don't mean to be argumentative here, but you are continuing to issue equity at below net asset value. You're not - it's not the most efficacious way to grow the business.

No, let us repeat something that was in the earnings call that you might not have heard loud enough. So let's repeat it clearly. The reason we issued the $45 million in preferred stock at 8% in the last quarter was to stop issuing as many shares through the drip and sip. So by drastically cutting that back, we're going to grow through preferred stock. And the fact that we were able to do the $45 million in preferred stock at 8% shows we can continue to grow in the future, issuing preferred stock as opposed to common. So we think that that should be a major plus for the stock today. Add another factor. You talk about the dividend not being covered by FFO. But the primary business of UMH Properties was purchasing undervalued communities. Look at all of our acquisitions, and then adding value to them. And so when Anna did the refinancing, and did $65 million of mortgages?

We did over $100 million this year so to date.

And the original value of those communities, what we paid for them was far, far less than what we took out on the mortgages. So that, if you took the $5 million short fall in dividends, I think we could have handled that for 12 years based on the money that came out from refinancing. So there was never any danger of not paying the dividend. There are people who don't invest in stocks where the dividend doesn't cover the FFO. But UMH is not your typical REIT that is buying 5% cap rate properties and looking for small rent increases each year. We're buying undervalued properties, fixing them up, and adding significant value to them and that significant value is far greater than the earnings or the FFO.

Right, I appreciate that clarification, Sam, and I realize that the embedded value in the company is such. But I guess I was actually taking notes here, early in the conversation, you talked about planning to do $100 million in new common over the next several years and that might be less…

I don't think we said that. So we don't have any plan of issuing $100 million in common. We have a plan of doing $100 million in acquisitions through debt and the preferred stock. There is no plan to issue $100 million worth of common. Write that down, we just said it, make it clear. There's no two ways about it.

Okay. All right.

And let's see if there's any other questions on the queue.

Thank you.

Yes.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

Thank you, operator. I would like to thank the participants on this call for their continued support and interest in our Company. As always, Gene, Anna, and I are available for any follow up questions. We hope to see you at the NAREIT Conference later this month and we look forward to reporting back to you in March with our year end results.

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