ABOUT THE EPISODE
Recently I interviewed Sam Landy, CEO of UMH Properties (UMH).
I found this interview extremely valuable and I hope you will take the time to watch it (26 minutes long and transcript below).
Analysts are forecasting UMH to grow by 27% in 2021 and 16% in 2022. Listen to the video and Sam Landy will explain how the company is using really cheap debt to drive the needle. (We have a HOLD rating on shares now due to valuation).
Hi, everyone. This is Brad Thomas with the ground up and I'm back again with another CEO round table interview. And today I'm joined with Sam Landy. Sam is the CEO of UMH properties. Sam is in Florida today, which you can see in the background nice day there. So thank you, Sam. And a much needed vacation, but Sam, I got to tell you before we get started, man, you need a break. I mean, you've really done a great job navigating through this global pandemic. I was looking earlier today and the share price now is trading at all time highs. So congratulations on on that. So Sam, can you talk about 2020. Let's start there and how you were able to navigate through this once in a lifetime pandemic?
Well, I grew up on a horse farm. I live on a horse farm and I always come back to farming. We did all the hard work. We cleared the fields, we plowed the fields, we planted the crop and 2020 we had some bad weather and the bad weather was caused by a couple of factors. One, we're always very conservative. We had deals in front of us to close in the last quarter of 2020 and 2021.
So we issued about 100 million in preferred stock early in the year because we had the ability to do so. We can never know how long that ability will last, but once you issue it, you have to pay for it, which was at six and three A's. And again, the money didn't go to work until the end of the year. Additionally, as we have our controversial REIT securities portfolio, which was in retail and a lot of the retailers cut their dividend.
So we took two really hard hits in 2021, paying the six in three A's on 100 million before the money was out. And two, we lost about $2 million in dividend income from the REIT securities portfolio. So when those earnings came out, it hurt us in the first quarter of 2021. And COVID hit at the exact same time.
So the stock really went way down, but the foundation we've been laying all these years of 23,000 manufactured home sites, 8,200 rental units, we have 800 lots of expansions in the works was 400 being built this year. Our sales were a record last year at 20 million, and we continue to believe we can grow that. We've grown our loan portfolio above $40 million. So we have a fantastic team. I've got two professional engineers on staff and you're a developer. You know how valuable that is.
We have our in-house attorneys, our in-house CFO, our chief operating officer. We truly know what we're doing in buying those turnaround properties. And that's where, to me all the money is. You're buying communities at 40,000 a site or less, spending less than 10,000 per site, turning it around, adding what was a $50,000 rental unit. Although this year prices are up 40%.
So a that's getting closer to a $60,000 rental unit, but anyhow, we had that home and we rented out between 800 a month, 900 a month. So the demand is incredibly strong waiting lists, 95% rental occupancy of the rental homes through COVID, 98% rent collection.
So the business model of affordable housing in all real estate location, location, location, so we know how to pick a location. So you pick a good location. You take the property where the old owner, his idea of how you filled the sites was the old way. You had to sell the home or rent a lot.
Well, selling a home is incredibly difficult because people don't qualify for financing anymore due to changes in the finance law, but a larger company like us who has access to capital can buy that rental home, put it in and rent it out. And then this package, we have 8,000 rental units. Well, Fannie Mae looks at that and says, "We can lend directly against those homes."
The same loans that they won't do retail, right? One customer at a time at 2.62%. They're not going to do that. But to do a loan in bulk to us at 2.62, they'll do it. So we refinanced, we took a portfolio of properties that previously did not qualify for Fannie Mae financing. The GSEs changed the rules and accepted 60% rental homes. So they lent us $100 million at 2.62%.
Right at the same time, 100 million at eight preferred was callable. So you replaced 100 million at eight, but the 100 million at 2.62. And it's only going to be, I believe, the first quarter of 2021, that you will get the full benefit of that. You've got partial benefit in the last quarter of the year. I think this is the only quarter you get full benefit.
And in the future, 2022, 23, we have 500 million in additional preferred coming due between six and three A's and six and three quarters. We have a completely separate portfolio of 100 million in properties. That's the existing mortgages on them. Today they're going to appraise for 200 million exact same property. So we'll pull an additional 100 million out of those properties. I don't know what the interest rate will be in the future, but let's say it's 2.62.
So now you're going to go from six and three A's, six and three quarters to the 2.62, that'll be phenomenal. The better we do, and the longer we continue these growth results, even if we were issuing preferred the plus to the preferred may drop, we had the major breakthrough with one bank lending directly on the rental units at 3%. And we continued to work on the idea that the GSE should lend directly on the rental home at the same rate that they lend on an apartment. We haven't won that battle yet, but we have a lot of positive feedback that one day we're going to. So that's where we are.
That's amazing Sam. That's like winning a lottery ticket. I mean, those are incredible numbers. Now on your cost of capital now is significantly reduced. So that is interesting. I was not aware of that. Now, I want to talk about your growth. I know you're in the South in Florida, but I did see, I think a couple months ago where you had an acquisition in [inaudible 00:07:06] home state of South Carolina. So it appears you're moving South. Can you talk a little bit about your expansion and what you've been able to do with new deals?
So we've only acquired two communities in the South right now, Alabama and South Carolina, but through, I'm on the board of Monmouth three, and we knew that the widening of the Panama Canal would greatly benefit net leased industrials in the South. We have a director of Monmouth, Casey Conway who's economist who refers to it all as the golden triangle. And so the demographics for the South are phenomenal.
And UMH wants to do business here. You have to get started somewhere. It is inefficient to open one community in each state, but those are to be hubs for us to grow from. Let the brokerage community know we're down here, looking. Let the towns see what a good job we do, turning around properties. And we believe you have to get your foot in the door somewhere or foots in the door and we'll continue to grow.
Yeah. So Sam, one thing that's really attracted me to the manufactured housing segment has always been the ground lease element. Obviously, ground lease is one of the safest forms of real estate ownership. And you have a mix of ground leases ground and buildings or houses. Typically, what's your mix? I'm just curious, in terms of your mix of just land only versus land plus rentals.
So again, we won this battle that Fannie Mae will accept 60% rental units of the community. We're also building Memphis Blues that's going to be the first all rental community. And we've pretty much established that when it's all rentals, the GSEs we'll do it as one loan, lending on the house and a lot. So that's great news. In regard to the other communities, you have some areas like New Jersey or Eastern Pennsylvania, Eastern New York, where housing is so expensive that despite all the cycles manufactured housing has had, you maintain 95% occupancy with no rental units.
Our product is just so cost-effective that no matter how bad the housing downturn was in 2009, the lack of retail financing in 2002, whatever the crisis was, people continue to buy houses and you maintain that 95% resident owned home occupancy, but that's not true about the areas of Pennsylvania, which lost the coal, steel, entire jobs, Ohio, Indiana, Michigan, all of those areas.
From our point of view, it was a once in a lifetime opportunity. These places had demographic contraction. There's documentaries about Dayton, Ohio. It didn't matter if you owned a manufactured home community, apartment complex or residential neighborhoods. People abandoned these areas, they left. And so we were able to acquire communities with substantial vacancies, where the owner could not do capital improvements because his income stream was going down.
Didn't have the money to buy rental units. Wasn't making money on sales. So we were buying these 70% occupied communities of 40,000 a site. Now the way to fill them quickly is when you take most communities have 50 by 100 lots; 5,000 square feet. When you add your thousand square foot, three bedroom, two bath, energy efficient, vinyl sided, shingle roof manufactured home to that 5,000 square foot lot with two car driveway and a shed and you're renting that out for 800 a month, people abandoned their existing apartments. Even if the demographics are not improving, right?
People are not moving in from Florida, Texas, wherever, just the local people in the existing apartments will look at what you have and say, "Look at that. No common wall neighbor above, below, or beside me. I could have my dog outside. I get my own driveway, my own shed, my own house.
It's energy efficient, I'm going there." So we're able to achieve occupancy increases in Western New York, where the population declined 1% a year. But then if we're in a place like the whole Pittsburgh market, Ohio, Indiana, we're in fact, the demographics are improving dramatically because of Marcellus and Utica shale, low cost energy resulting in domestic manufacturing, RV business thriving in Elkhart, Indiana. All of these things that are bringing people from other States. Well, we just grow that much faster and do that much better.
Right? I want to ask you about kind of an extension of the business. I know a couple of your peers are now in the Marina business. And I want to ask you about the tiny homes. I've got a friend here in South Carolina, and he's very enamored with the tiny home community business. And I'm just curious, is that an area that you've explored? Are you familiar with that particular niche in your business model, is basically as I call out, they're like RVs. That set up his houses or whatever you want to call them, but do you see any opportunities there in tiny homes or even Marinas? Any other... Are you going to stick just with your bread and butter?
Well, I've always said that Sun Communities is three years ahead of us. They went to rentals in 2009. We went to rentals in 2011. And so if you graph their stock price chart and our stock price chart, and think of it that way, the better you do the lower your cost to capital goes. So once they're close to capital's low, well then those RV communities, they would trade and say a six and seven cap. Sun's cost of funds was 2 or 3%. Easy decision, do the deal. Same thing happened with Marinas. Our cost of capital continues to drop, which will open up more and more different opportunities to us. In regard to the Tiny Homes, Tiny Homes are greatest. Those vacation type destinations. A guy told me a story about Tiny Homes. It's a pretty good story.
It was out in California and he has a major manufactured home community in a retail location. And people kept telling him, do tiny homes. And he kept saying, "They're too small and they're not going to work. Nobody's going to live there." And then he said, "You know what? Am I crazy? I'm arguing with my customers telling them they don't want what they want. I'm going to put a tiny home on my sales lot." He put the tiny home on the lot, business cars pulling in. Everybody wants to see it. And everybody looked at it and said, "I love it, but I just want something a little bigger." And then he'd sell a manufactured home.
Then the Mayor of the town called him and said, "Listen, I really need you to build a tiny home community." And the guy thought, "If I asked this guy to let me build a manufactured home community, tell me, get lost." So I'm going to show them the plans for a manufactured home community. And I'm going to tell them it's a tiny home community. So I showed him the plans for the manufactured home community and said, "Look, this is a tiny home community." Mayor said, "I love it. Let's build it." So there's a lot to be said for tiny homes, but I don't think we're going to do them unless we do a vacation resort.
Yeah. That makes a lot of sense. Let's move over to the... I know more of a touchy subject, but you've already touched on it, which is the securities portfolio. I know that you've already told investors that you're going to limit your securities portfolio, 15%. You're well below that now. You've got about $103 million of REIT securities. You've already pointed out, the major dividend cuts hopefully are over CBL Washington prime, et cetera. So what's your viewpoint on the securities portfolio today? Are you going to continue to trim it or are you going to maintain it? Where do you see that securities portfolio?
So we've announced we're going to shrink it. It's down to 8% of assets and we've actually sold off at least one position. But I want to talk to you about the securities portfolio because it's very important. So my father, Eugene Landy founded Monmouth three. Single best performing sector in the REIT industry, net leased industrials and manufactured home to me. So he founded [inaudible 00:15:43], two best areas. He also took the opinion that retail cannot leave this country. Now, a lot of times, really bright guys, like my father moved too soon and you can absolutely said he moved too soon. But if you look at the realized gains in the securities portfolio plus dividends, it's something like $74 million. That number is off the top of my head. I'm not reading it. So-
... check the financials, make sure I got it right. But it's something pretty close to 74 million, and when you looked at the worst case to market downturn, it was bad, but you didn't lose all we made. And today that the portfolio has come back up to a hundred three million, not by us buying additional securities, but the value of the existing securities going up. So his point was always just a smaller REIT like us, needs to always have cash on hand to do acquisitions and to provide for a rainy day.
And I don't think anybody would argue that REITs are not a good way to do that. It's liquid real estate that you could move in and out of for quicker that you could move in and out of properties. So nobody's optic was ever to lose money, lose capital. The theory was, you got to try pretty hard to put a REIT in bankruptcy.
And so you weren't supposed to have any losses like that, but at any rate, the REIT portfolios performed well, it had a bottom point. It had a point where things looked very bad. It's past that point. During COVID, we learned that our rental manufactured housing business was better than we ever imagined. Prior to the downturn, people asked us, how would we do in a downturn?
And we said, we would do just like apartments. If you have a downturn, you're going to have some vacancies, you're going to have receivables. It's going to be an issue, but we're conservative. We'll get through it. Well, as it turned out through COVID, we maintain 95% rental home occupancy and 98% rent collections.
And looking at that, that gives us confidence to shrink the REIT portfolio, to not need as much cash on hand, to know that we're a more mature company, our relationships with our bankers or investors and everyone are stronger than ever so that when we find a deal and need $100 million to do an acquisition, we can get that money very quick. We're a different company than we were five years ago, far different company than 10 or 20 years ago. We continue to grow and improve, the REIT portfolio was needed when it was needed and it's really not needed anymore.
Yeah. Well, look, and I'm not going to be an armchair quarterback here, Sam. I mean, we've made a number of investments that haven't panned out and none of us could have prepared for this black Swan. And by the way, Tanger has bounced back, which I'm glad, but I don't know if the company still has a position in Tanger, but at any rate I want to touch on one last thing, which of course is the dividend and the growth prospects. Let's start with the dividend. If you will, you've had a flat dividend, but we're starting to see that opportunity now. We're finally. We saw it with Monmouth. You took a while for your brother to start with his dividend plan, but he's done a great job with Monmouth, with increasing net dividends.
So now it appears that you're primed for some dividend growth because as you know, one of the things I've pointed out in a number of articles is there hasn't been a lot of dividend growth, but now with the growth forecast that we see now, UMH doesn't have the huge analyst coverage yet. You've got about eight... less than a billion dollar market cap. So but you've got, I've got a number of analysts. I'm looking at the analysts scorecard are basically consensus forecast for 2021. And Sam I had to check my glasses because I can't see that well and I couldn't believe.
I mean, 27% is my analysts forecast for 2021. Now there's only five analysts. I don't have 15 or 20 Federal Realty, but I've got five analysts. And I'm sure they're all smart that are saying, an average consensus of 27%. I mean, that's hard to believe, but again, I can see it on the screen. So it appears that UMH is prime to grow the dividend. Now I'm not going to ask you to comment on dividend policy or whether the dividend is going to grow or how much, I know that's decision made by you and the board. But am I clear here that... clearly UMH is prime for some dividend growth?
Absolutely. I mean, think about what we were doing. We were using preferred stock to grow the company, issuings common, to keep the ratios correct, but there's 40 million shares outstanding with over a billion dollars in real estate. The assets are more than that. We own 800 million worth of rent. I gave you the number 800 million, 8,000 rentals, times 50,400 million in rental homes. So, but take that billion in real estate. We're out there intentionally increasing the value of that real estate on your paths of properties.
Your more passive properties that are already 95% occupied. If you take just 4% increase of value of that whole billion, that's $40 million. We only have a million shares outstanding. So that's a dollar per share appreciation. And so the years that our FFO did not equal the dividend, which we took a lot of criticism and it knocks the stock price down, but we knew based on our capital structure, more wealth is generated from the appreciation of the properties than even the FFO.
And so we knew we were able to maintain that dividend. And today the FFO exceeds the dividend, even after the dividend increase. Our objective is to get to an 80% payout ratio and still be further increasing the dividend. And when you do the math, we have about 140 million in rent, which will have a 4% rent increase on. So that's approximately $6 million. We'll add 800 to 900 rentals at 8,000 a piece. So that's another 6.4 million in income. Sales made money, made a million dollars for the first time last year. And so you add all that and you factor in, our expense ratio is going down, but the expenses are currently 46% and you see substantial increase in FFO per share coming in 2021. And if you go out five years and start factoring in the reductions in our cost of capital, by recasting that preferred with lower expense debt and five years from now, it's not crazy to say FFO could be a dollar 25 per share.
And again, we want to pay out 80%. So, like everything else, we need everything to go right. It doesn't always go right. But we've been working all these years. And in some cases it's 15 years on getting approvals to build expansions. We own 1,600 acres of vacant land to build expansions. Each time we get a turnaround property past a certain point, say 80% occupancy, it just becomes more and more efficient and more and more profitable. And that's what we're doing. It's been a great plan that had the hiccup we talked about in 2020. The hiccups past and the success should accelerate.
Great, well closing thoughts, Sam. And again, I want to be perfectly clear. I'm not an activist, I'm a suggestivist. And there's a big difference. The different activist and suggestivist, activist has a lot of money. Suggestivist doesn't have a lot of money. So I'm a suggestivist. The only thing I see here and the dividend increase is great. Again, retail investors love it. Investors love it. Institutions really don't care as much as about that. But in terms of the dividend, and I think you know where I'm headed, is that monthly dividend, you get rent checks every month. So why not convert that every month to dividends instead of every quarter? So take that up with the next board meeting. I'm just a suggestivist. I'm not an activist, you're doing a great job. And again, the only cracking the arm or I see you right now is it'd be great if you would have had a monthly dividend program.
And by the way, Agree, which is an indirect peer for Monmouth, triple net REIT, they just started with a monthly dividend in the last couple of months. So it does matter. Retail investors do have a voice. I mean, we know Reddit and we know what happened with Reddit and there's a lot of retail investors. So there's definitely a retail voice. So consider that monthly dividend and, but other than that, keep doing a great job, Sam, and tell Mr. Landy, hello. He's a legend in the REIT space.
Well, thank you very much. And we will take that under advisement. And my father created this company with small shareholders that he spoke to before every board meeting to know what they thought and to know what they wanted to do. We don't want to change that at all. We want all of our shareholders opinions. We want to think about it. We want to do what's best for the long-term interest of the shareholders, the company and the people who work at the company. And we invite comment and we're very happy to hear it and think about it.
Sounds good. Well, Sam be safe out there and thank you again for your time.
Talk to you soon. Bye-bye. Thank you.