Good morning, and welcome to UMH Properties' Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also 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 begin.

Thank you very much, Operator. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited second quarter supplemental information presentation. The supplemental information presentation, along with our 10-Q, are available on the company's Web site, at umh.reit. I would like to remind everyone that certain statements made during this conference call, which are not historical fact, 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 the company's second quarter 2019 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements. In addition, during today's call, we will be discussing non-GAAP financial metrics. Reconciliations of these non-GAAP financial metrics to the comparable GAAP financial metrics as well as explanatory and cautioning language are included in our earnings release, our supplemental information in our historical SEC filings. Having said that, I would like to introduce management with us today: Eugene Landy, Chairman; Samuel Landy, President and Chief Executive Officer; Anna Chew, Vice President and Chief Financial Officer; and Brett Taft, Vice President. 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. We are pleased to report our results for the second quarter, ended June 30, 2019. Our business operations continue to progress as expected. Our top line income and sales growth, coupled with improved same-property occupancy rate continue to validate our business plan. Rental and related income for the quarter was up 11% over last year, sales were up 51% over last year, and same-property occupancy is up 140 basis points or 301 units. The improvements that we have made at our communities has resulted in the increased demand at our locations. Normalized FFO per share for the quarter was $0.14 as compared to $0.18 last year, representing a decrease of 22%. This decrease in per share FFO can primarily be attributed to our recent preferred issuance and a reduction in dividend income from our REIT security portfolio. During the quarter, we issued 100 million of our 6.75% Series C Perpetual Preferred Stock. This transaction will allow the company to accomplish our future growth objectives, but at a short-term diluted effect of $0.03 on our second quarter earnings. As we deploy this capital into new acquisitions, rental homes, and expansions, our earnings will rise accordingly. We are also still feeling the impact of the reduction in our dividend income from our REIT securities portfolio. This had a negative impact of approximately $0.01. As we have already stated, our business plan is long-term in nature. It typically takes two to three years for value-added communities to become fully accretive to earnings. The value created by our business plan is demonstrated by our most recent community refinancing. Subsequent to quarter end, we obtained two mortgages totaling approximately $39 million. Two of the three communities included in these loans had existing mortgages with the balance of approximately $11.6 million.…

Thank you, Sam. Funds from operations or FFO was $5.7 million or $0.14 per diluted share for the second quarter of 2019, compared to $6.2 million or $0.17 per diluted share for the prior year period. Normalized FFO, which excludes realized gains and losses on the sale of securities and other non-recurring item was $5.7 million or $0.14 per diluted share for the second quarter of 2019 compared to $6.7 million or $0.18 per diluted share for the prior year period. As Sam mentioned, this decrease in per share FFO is primarily attributable to the impact of our leasing capital and a reduction in dividend income from out securities portfolio. Rental and related income for the quarter was $31.4 million compared to $28.2 million a year ago, representing an increase of 11%. This increase was primarily due to community acquisitions, the addition of rental homes, and the growth in occupancy. Community NOI increased by 6% for the quarter from $15.5 million in 2018 to $16.4 million in 2019. Our normalized operating expense ratio increased to 47.7% from 45%. The increase in the expenses can be attributed to increases in sewer, rental home turnover, and the growth of our community level staff. We have also paid increased incentives due to the occupancy of an additional 301 sites during the year. We expect the expense ratio to decline as new revenue originated during the first-half of the year, offset the increased expenses. As we turn to our capital structure, at the end of the second quarter, we had approximately $366 million in debt, of which $327 million with community level mortgage debt and $39 million were loans payable. 91% of our total debt is fixed rates. The weighted average interest rate on our mortgage debt was 4.3% at the end of the…

We are very proud of the business we're in and the portfolio that we have built. Manufactured housing is the most efficient and practical way to meet the affordable housing demands in America. We can provide a quality home and a safe community that is affordable for low to middle class families. This is being recognized by our elected officials. And we anticipate both some regulatory relief for the industry in the coming years and improve financing terms for portable manufactured housing. Recently HUD Secretary Dr. Ben Carson organized an innovative housing showcase on the National Mall in Washington, DC. UMH sponsored a single section home to show on the mall. The excellent exposure that our product received from this event cannot be overstated. As we look to the future, this event, the need for affordable housing may lead to Greenfield development opportunities for UMH. Further, President Trump signed an executive order in June, directing federal agencies to work together to facilitate the production of affordable housing. The executive order focuses on alleviating barriers that impede the production of affordable housing. The order also created a White House Council on eliminating barriers to housing development. And one of its goals is to adjust federal programs to incentivize localities to reduce regulatory barriers or condition federal funding on such reduction of local impediments such as zoning and land use restrictions. These are all very positive developments for our industry. The fundamentals of our business have never been better. The need for affordable housing will be with us for a long time. The strength of both our sales and rental operations is encouraging. As the company continues to grow, we will be able to operate more efficiently. We are well-positioned to fill 4000 vacant sites and also obtain modest rent increases of 4% for year. Achieving both of these goals will be result in significant earnings growth. As our community NOI improves, we can refinance our properties effectively realizing property appreciation without selling any assets. That capital can then be reinvested into our core business we will distribute it to shareholders. We will now be happy to take your questions.

Thank you. [Operator Instructions] And today's first question comes from Rob Stevenson of Janney. Please go ahead.

Good morning, guys. Sam, you'd indicated you had one property under contract that you expect to close shortly. What does the pipeline look like behind that on the acquisition side?

I am going to let Brett answer that. Go ahead.

Yes, so that property it's 386 site community; 86% occupied, it should close within the next few weeks. Behind that, we don't have anything under contract at the moment. We are exploring several acquisition opportunities, but pricing hasn't been in line -- haven't really wanted to get as aggressive as some of these guilds are trading for. So, we are working to build a pipeline, but at the moment it is empty.

Okay. And then, Sam, can you talk about expectations for occupancy going forward? Where are you experiencing stubborn pockets of vacancy where there is not much demand versus places where you -- all you need to do is essentially put a rental home on a site and you can get occupancy up. Can you help us think about how we should be thinking about that heading into next year?

Well, first our 300 unit improvement in occupancy is the best we have ever had. That's the equivalent of building and filling a 300 space community in one year. So, that was incredible growth. And each of the regions is growing. I was looking at the list. But, there has been strength in all our markets over the past 12 months. And it's getting stronger. The only problem in accelerating our growth, it's difficult getting setup crews and rain is slowing it down. But as a general matter, we expect to go forward faster now than we did a year ago. Demand seemed strong. Our marketing is working people accept the product. Rentals and sales growth 50% is phenomenal. And so really appears that what we have done improving these properties and marketing those improvements has worked tremendously. And people out in the field are busier than ever in all our markets. I can't think of one that's going backwards.

Again what's limiting you from increasing the number of rental units that you have put in place next quarter by an incremental 25 or 50 over what you did this quarter over first quarter? I mean what's limiting the acceleration of that program? Is it the availability of the homes? Is it the demand from the renters for it? Can you help us understand that?

So, the first quarter it was just winter, slowed down the setup of homes. But from here forward, I don't think anything is going to slow it down. You have issues getting enough setup crews and going fast enough there. But in terms of demand and the communities we've acquired, the new communities in Indiana and Ohio, demands exceptionally strong, and there's plenty of vacant sites to go faster. So we have that potential and we're working on it.

Okay, because I mean, if I look at it you did 183 rental communities in the second quarter of '19 versus 224 in the second quarter of '18. And just trying to figure out whether or not there was something fundamental that sort of caused essentially a 40-unit decrease year-over-year or whether or not that picks up and we see 260 in the third quarter or something like that?

Yes, I just wanted to add one thing to that. Sam had mentioned the winter, but it's also been a very wet spring. It's been very hard to spot some of these homes on sites, so pair that with the shortage in set crews, and that's why you see the reduction of 40 over last year.

Okay. Anna?

Yes.

Anna, I know you usually have the annual meeting in second quarter G&A. Anything else abnormal driving that increase this year?

No, G&A was approximately the same at it was last year, so I think we're okay with that. We do expect this to go up a little bit towards the end of the year due to some increases in personnel as well as some increased space that we may be taking.

Okay. And then did you guys make any buys in the securities portfolio this quarter?

Minimal, I mean I think what we usually do is we do the dividend mins [ph] investments for the Monmouth REIT shares, but that was about it.

Okay. And then remind me, Monmouth is basically capped out and said that they're not doing any more investment other than their dividend reinvestment and you guys or you guys have the same program at this point in time?

Yes, pretty much so.

Okay. Thanks, guys.

Our next question today comes from Barry Oxford of D.A. Davidson. Please go ahead.

Yes, thanks guys. Sam, could you give is a little color into home sales, and where you see that headed over the next 12 to 18 months?

So we've been working every year on creating a real sales company and making sales a big part of UMH Properties. The fact that sales are up 50% and that they were now profitable proves it's working. At this moment, we're increasing the size of the Port Royal sales center, adding a multistory house and a modular. All of these things add to your expenses, but we're doing it because our people are proving they can do outside-of-the-community land home deals. We can sell in the community. And we have the ability to continue to grow sales, and to take the sales centers at existing communities and increase the volume of the sales they do, both through the community and outside the community doing land home. So, it's difficult to put a percentage on it or tell you how quickly it'll happen, but each manager that gets their first commission check becomes a better sales person, and we just see the ability to continue to grow this and grow its profitability.

The United States is short two, three, four million units of affordable housing. And the shortage is growing each year. We are not building anywhere near the housing we built a decade ago. The manufactured housing industry is only 100,000 a year, for decades we were 200,000-250,000 units a year. If this industry comes back to what it was to satisfy the need for affordable housing, we are talking about the industry doubling in size. For that reason, UMH, with 122 communities, wants to not only have a sales operation in each of those communities, but we intent to have three, four, five regional centers, and participate in the growth. Now, we have to see whether to government helps, would financing be available, and if the economy continues to expand and that the country does succeed in fulfilling the need for affordable housing. So if this occurs UMH will be a very profitable participant in that growth.

Great. Thanks so much for the color, guys.

Our next question today comes from Albert Sebastian of Prospect Advisors. Please go ahead.

Thank you. Good morning. I have a couple of questions, maybe a little bit more than couple, but first, were there any sales from the securities portfolio?

No, we didn't sell anything in the securities portfolio. We also, as I said before, did not purchase anything except for the dividend reinvestment and we've been keeping our portfolio at the 9.5%. As I said before, we're not going to go over 15%. But as we grow out assets in our core business without acquisitions, that percentage should decrease.

Okay. I guess what I'm trying to understand is, historically, you've issued a lot of stock. I mean, the shares outstanding have gone up quite a bit. I know you probably feel that your securities portfolio is undervalued, but so is your stock. I guess, why would you issue so much stock in the quarter and not sell anything out of your securities portfolio? Surely, there must be something in your securities portfolio that you feel your stock represented better value than one of the positions?

Well, let me try to help you with that question. You know, one of the great developments has just been in the last few days, though it's a continuation of something that we were seeing for a considerable period of time. We issued four years ago $100 million of 8% preferred. We're putting this Company in a position that in October of next year 2020, we intend to call that preferred and we're budgeting $3 million, $4 million, $5 million in increased earnings through the simple expedient of paying down a high course preferred. By the way, when we issue the preferred at 8%, we used to joke that we issued the preferred at 8%, bought parks at 6% and 7% cap and we're going to make a lot of money. But we certainly did, the $100 million we issued, we used to buy $200 million, $300 million in parks that are much more valuable today than they were when we issued the capital. So the preferred -- having $110 million is about $108 million today of liquidity, gives me utmost confidence that October of next year within a call the -- it's $95 million.

$95 million, yes.

$95 million of 8% preferred and we place it hopefully with 2.5%, 3% debt or even just sell some securities and pay it off. So the trend towards low interest rates helps us and this one capital move helps us. And on top of that, the low interest rate climate we have $100 millions of debt we got to roll over will increase the debt and be able to borrow. Anna, when you last borrowed at what interest rate?

3.41%.

3.41%. So we've kept the Company liquid. We realize that the securities portfolio has gone down in value and that we've seen a reduction in dividends. But it still gives us a lot of liquidity and confidence to realize our future plans.

But when I take a look at your diluted shares outstanding, it was $39.9 million at the end of the second quarter or I guess maybe during the quarter. But anyways, looking at it at the end of 2014, it was $22.5 million. So that's quite an increase in these shares outstanding. It actually works out, if I did the math correctly 13% on the annual growth rate of 13.6%.

I don't want to interrupt you, but I don't think your numbers are right. We've been issuing about $3 million worth of stock a month, $36 million a year with a dividend reinvestment $40 million. And we've been investing $100 million to $150 million a year. We continue to issue equity though, we make it necessity, but things change. The Company changes every time and we're growing the company, we're putting in 800 rentals a year, the use the cost to study $2 million. I think now 800 would be closer to $40 million a year. And we've done very well in acquiring parks and they've been very profitable. So the situation is that you have to issue some equity we sold in four days a $100 million in preferred. Well, we did it because everybody had confidence in our strong financial statement. So we do recognize that the net asset value of our stock is higher than the company's current market price and to that extent it might be dilutive of book value. We don't think it's dilutive of earnings. So, go ahead, Anna.

So I was also going to add that over the last five years we've also had a total return of 80%. So yes, we did issued shares but those shares were used to grow the company and also to give a return a bigger return to our shareholders.

Okay, can I just ask one more question?

Sure. Go ahead.

Yes, I was just -- I was looking at your peers. I was looking at Sun Communities and I was looking at equity life sell properties. And over the last two years Sun Communities is up the price return. I'm pretty sure I got this right. And I'll take a look at my numbers on shares outstanding but Sun Communities is up 59% equity lifestyle properties is up 50% over the last two years on a price basis. UMH is down 18% over the last two years. Is there something? How do you explain that? Is there some --

So, yes, good. It's a good question. So, in the beginning, Sun Communities started with rentals three years before UMH. So we need to catch up there which we are doing. Additionally, liquidity is valued, the more shares you have outstanding the larger your company is, the lower the cap rate you trade at. So that Sun Community stock and ELS are yielding 3% or less. And we're yielding over 5%. Size alone will -- could potentially double our stock, so our yield becomes the same. Additionally our business plans are different. They're buying communities that increase their FFO because they can buy at a full cap and their cost of funds is a three cap. And that's a creative. So though these 95% occupied perfect condition communities that they can acquire are accretive to them because of their low cost of capital, we're doing something different that is actually much more evaluated, as indicated by the communities we refinance at 10% per year growth in value. And what that is if you buy these 60% or 70% occupied communities, that takes three years to turn around that actually decrease your FFO the first couple of years you own them. But at the end of a five-year period, they've increased in value more than 50%. And our returns will actually someday be greater than Sun's and ELS's when we can demonstrate to the market the increased value of these properties and as we get more of the revenue growth and communities can't operate efficiently until they're over 80% occupied. So when you hit that point and the revenue growth becomes a new earnings and we show that earnings growth, people are going to notice that UMH is trajectory of increased earnings and FFO exceeds the other companies and our stock will do better. And to go a step further along that we were well on the way to doing that. And this quarter only had two setbacks that stop people from seeing exactly what I'm saying. And the one is $2 million less in dividend income from the REIT securities portfolio. And the second is issuing a 100 million in preferred stock, which costs money today and doesn't add -- earn money till tomorrow. So but for those two things, you would see that everything I'm saying is already true. And the stock could react, it could react to it today anyhow or it could react later.

Okay, gentlemen. Thank you so much. And ladies, thank you so much for your time.

Our next question today comes from Merrill Ross of Compass Point. Please go ahead.

Thank you and good morning. My question is in absence of an acquisition pipeline, is there any way to invest in community stabilization with greater efficiency and shorten the timeline to stabilization? You know, I realized that the market doesn't want you to spend money and then earn a return over three years. They want you to spend money and earn a return now, and that you just answered that question. I'm just wondering if there's because there is so much better value creation in stabilizing those communities. I'm wondering if there's any way to make it more efficient.

Well, we are working on efficiency gain. I'll talk about what we're doing for efficiency.

Yes, so for efficiency to get a better handle on expenses, where it's selling meters on even more units. We have 4500 total units that are not submitted and are on public water. We're going to do 1200 units this year. On top of that, we're doing a lot of stuff with software. So we're going to have real time updates of every day of what the master meter is off at each community is saying for how much water is flowing out. And the software immediately alerts us if it exceeds a certain amount per unit, it alerts the manager of that corporate and the regional. So the faster we get on top of leaks and high usage, the faster we fix it, and the faster we control that expense. Additionally, we're going to automate more tasks at the community offices for paperwork, getting people to pay online more, this will reduce the need for extra help at a community office, which should help control some of the growth in salaries and stuff like that. And the final item is although a software, we're going to have even more detailed analysis in basically, certain items we purchase, such as tools, make sure that no communities are ordering in excessive amount of tools as well as have a better understanding of what we buy. And essentially, when we buy, we're going to buy up the most cost-effective way. Such as like we might have data on, for example, something like how many hammers we order or something like that and combine the purchasing power and effectively purchase these cheaper in bulk.

And I point out the door, go ahead, yes.

And Gene mentioned the regional sales centers. You -- is that one that you refer to? Is that as a regional center at this point?

Yes. Brett will talk about the one that's doing so well.

Yes, so we have two regional sales centers. We have the one in Melbourne, in Pennsylvania, they have pipeline of about 12 homes right now. So that's very encouraging. And then, we have our Anderson, Indiana Sales Center, which is also a regional sales center. They've done about $430,000 in sales is here, but they have a five-home pipeline with about $700,000 in sales in it. They also have another four or five communities that will do or four or five homes sold within the community. So we do expect those to continue to grow as we're able to build our pipeline up at those locations.

Are you going to add more?

Yes, yes, there're other communities, Kinnebrook, Heather Highlands. Sunny Acres, so we have additional communities to work on sales there.

Thank you.

And our next question today comes from Craig Kucera of B. Riley FBR. Please go ahead.

Hi, good morning. I wanted to talk about your selling expenses first on the manufactured homes. Can you give us some color on sort of how we should think of the fixed versus variable costs there going forward?

Yes, so the fixed costs, you've got your cost of sales. So what's the cost of the home and the homes are marked up 30%, you have your variable costs, which I would consider your marketing your commissions, you have to heat these homes, you have to pay taxes on them.

Right, a lot of the -- our costs and selling expense is fixed. Because it's the marketing expense, which we have the marketing budget, it's the employees, the salaries of these employees. So, all of that goes into our selling expense, so, a lot of that is pretty much fixed.

I want to point out what a wonderful team we have. We have less than a week's notice of the opportunity of this buying a home on the Washington mall. And within that week, we purchased a home, moved it to the mall, set it up, had a wonderful reaction to the display both from our representatives in the public. And then of course, you have to tear the house down and move it back to where we're going to ultimately sell it, it was in terms of dollars, it was an expensive thing. In terms of public relations and helping the industry and helping us and our long-term plan, you can't -- you have to say that that's the best public relations program we've ever had. And of course, we have it on videotape. And we hope that eventually you'll go to our website and see the display and see the Secretary of Housing give a rousing speech in favor of manufactured housing. So it was certainly money more than well spent.

Okay. Well, let me ask you a little differently. I guess a couple quarters ago, you sold about 4.6 million in homes. And I think you are selling expenses were about $0.02. In this quarter, they were $0.03 a share. I guess should we think that $1.3 million is sort of a decent amount of selling expense if you continue to sell about $6 million a quarter? Or, is it going to vary if you accelerate sales even more because of marketing spend, or how should we think about that?

So there are increased expenses because we -- our confidence is high and we are working on growing the sales so that take the Port Royal sales office, there is one extra new employee with no new closings yet. And that's going to be the situation. As we see a market that's working well, we are going to be employing additional people bringing in additional homes, doing additional setup work. But, by the end of 12 months, the object of this is that it adds profitable revenue. So quarter-by-quarter, especially at this time of the year, the expense may grow as a higher percentage than the income. But we expect the end result is going to be the income grows more.

Okay. Going back to last quarter, I think you were talking about a pipeline of about 1200 units at $45 million. You closed I think 31 million here. Early in July have another asset. Did you pick up another community quickly? And as we look to what's supposed to close in the next few weeks, what's the dollar value of that community?

Yes, I am blanking on exactly what it was at the -- what we reported in last quarter. But, we did get two additional properties under contract since that call. So I believe that's what we are talking about there. Those were two communities. Two hundred and eighty five sites in the Pittsburgh market for $11.65 million. One property under contract now is about $25 million deal. There is a $12 million loan being assumed. So we will put out another $30 million in equity to get that deal done. That's in Erie, Michigan. Very close to our Harrisburg property. It's a very high end community, and we are excited to add it to our portfolio.

And I know the occupancy on the acquisitions that you have closed already this quarter was low even for you guys on average. But what's sort that going in kind of year one cap rate on the acquisitions you are expecting to close here this quarter?

So the going in cap rate on the deals that we closed this quarter was about 6.5%. That being said, we will be increasing expenses to turn these communities around. I just want to point out a few things about our previous acquisitions. So in 2017, we acquired 2000 in sites. Those acquisitions we improved occupancy by 230 units since the time of acquisition, fifty six of those units being this year. So those properties have performed very well and are now operating at 48% expense ratio. And we were earning somewhere around 7% there. So that's very good. In 2018 last year's acquisitions, we've actually lost occupancy by 24 units. This year we have improved by 14 units. Obviously, we are still completing the turnaround work at these properties. Our operating expense ratio is 64% there. So as we are able to bring that operating expense ratio to 50%, we will see an additional 425,000 to the bottom line at the current revenue level. Obviously, we will also be growing revenue. So, that's kind of the picture of what should happen with these newer acquisitions coming up here.

And most importantly, we are buying in for 28000 a site. And when you get up to the 90% occupancy and do the improvement, replacement close to 70,000 a site. And there is really no reason the value won't be 70,000 a site…

Okay. One more from me. On the expansions that you are delivering this year, I think you mentioned maybe 170 this year and almost 640 next year, how should we think about what the incremental cost is on a per site basis just from a use of capital and capital needs perspective?

So, we expect to invest $70,000 per site in the construction of the site. And then, first phases do negatively impact operating income because you are spending money on marketing. You have a person in the office. You are doing all those things. And you have to fill the sites. But, the purpose of it is you are hoping to make $30,000 per sale in the expansions and collect the lot rent. So, it takes time, but Fairview Manner, Highland Estates, those are the places we have made significant money building sites. And we expect that that's going to occur with the expansions we are building today.

Okay. Thank you.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to the management team for any final 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 look forward to reporting back to you after our third quarter. Thank you.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.