UMH Properties, Inc.

Good morning, and welcome to UMH Properties' second quarter 2023 earnings conference call. All participants will be in listen-only mode, and should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please also note that this event is being recorded. It is now my pleasure to introduce your host, Mr. Craig Koster, Executive Vice President and General Counsel. Thank you. Mr. Koster, 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. This supplemental information presentation, along with our 10-Q, are available on the company's website at umh.reit. We 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 the company's second quarter 2023 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 the explanatory and cautioning language, are included in our earnings release, our supplemental information, and our historical SEC filings. Having said that, I would like to introduce management with us today. Eugene Landy, Founder and Chairman, Samuel Landy, President and Chief Executive Officer, Anna Chiu, Executive Vice President and Chief Financial Officer, Brett Taft, Executive Vice President and Chief Operating Officer, Jim Likens, Vice President of Capital Markets, and Daniel Landy, Executive 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, Craig. We are pleased to report that normalized FFO increased sequentially from 20 cents per share in the first quarter to 21 cents per share in the second quarter of 2023. During the quarter, our share count increased by approximately 2.9 million shares from our issuances through the common ATM, raising $45.1 million in new equity, which is being rapidly invested in additional rental homes, expansion lots, community capital improvements, and financed home sales. Once these investments come online, this capital is expected to generate future FFO growth. Our past capital investments have made UMH a top performing provider of manufactured homes for sale or rent. During the first six months of the year, 534 of our 1,100 homes in inventory were rented. Additionally, we sold 174 homes. Our August 1st, 2023 rent roll is now 7.5% higher than it was on January 1st, 2023. Same property occupancy is now 87.9% as compared to 86% last year. Our same property rental home occupancy increased from 93.4% at year end to 94.1% at the end of the second quarter. Our same property monthly rent per site increased 4.7% and our same property monthly rent per home increased by 7% over the second quarter of last year. These improved operating metrics resulted in same property income growth of 9% with expense growth of 4.2%, generating same property NOI growth of 12.6%, or $3 million over the second quarter of last year. Our same property expense ratio decreased from 42% last year to 40% for the second quarter of 2023. The rapid occupancy of inventory should result in the further acceleration of our revenue growth this year. We are pleased with our high single digit percentage increase in same property NOI for the first six months of 2023 and our double digit percentage increase in same property NOI for the second quarter of 2023. In addition, total NOI growth for both the three and six months ended June 30th, 2023 have both experienced double-digit percentage increases. Subsequent to quarter end, we paid down $34.7 million of our floor plan lines, which have a weighted average interest rate of 8.8%, reducing it to approximately $4 million. This should reduce our interest expense for the third quarter and beyond and help increase FFO per share. Further, each $50 million in new equity represents approximately 3 million additional shares. The earnings generated from investing that capital typically requires time to be accretive to earnings. We are therefore very pleased with our sequential 5% increase in FFO per share to 21 cents for the second quarter. Gross sales for the quarter increased 18% to $8.2 million as compared to $7 million last year. Net income from sales for the quarter was approximately $665,000 as compared to $876,000 last year. Included in net income are higher interest expenses and elevated inventory carrying costs. During the quarter, we sold 91 total homes, of which 43 were new homes. Our average new home sales price was $141,000 and our average used home sale price was $45,000. Year to date, gross sales increased by 38% from $11.3 million to $15.5 million. Year to date, we have financed approximately 82% of our home sales. We have a total of $73 million in home loans on our balance sheet that earn us a weighted average interest rate of 6.8%. On the expansion front, we are on track to deliver 216 lots at four communities in our portfolio. These expansions are located in Maryland, Pennsylvania, Tennessee, and Indiana. These expansions are located at communities in good markets and should generate profitable sales. We continue to make progress filling our newly developed communities owned through the joint venture with Nuveen. We have gotten a message out to local developers that we will buy entitled land or newly developed communities that allow them to earn a fair profit for their work. This has resulted in numerous deals that we are evaluating and may execute at the right time. UMH continues to seek acquisitions that meet our growth criteria. Subsequent to quarter end, we entered into a contract to purchase two communities in Maryland containing 190 sites, for a total purchase price of $12.5 million. We are careful to evaluate each deal and weigh the short-term impact on earnings for the long-term yield expectations and value creation. Our typical acquisitions take three years or more to become accretive, but allow us to generate the strong long-term operating results that we are reporting today. Our growth is dependent on the ability to have vacant lots to fill. Those vacant lots are acquired through acquisitions development of expansion sites, or greenfield development projects. All of these growth initiatives provide long-term value for our shareholders and should continue to result in a growing dividend and stock price. Having 55 years of operating experience gives us great confidence in our business plan and our ability to execute. Our goal is to continue to grow UMH into a national company by maintaining a sound balance sheet and continuing to invest in our growth initiatives. Despite the headwinds in the real estate market and a challenging economic environment, UMH continues to excel. Our operating results are starting to positively impact the bottom line, even with increased interest expenses. Demand for affordable housing is at an all-time high. We are in a position to grow UMH on a national level and implement our proven business model in new markets. We have internal growth opportunities through the occupancy of our vacant sites, increase in rents, and through the development of our vacant land. We are well positioned to grow income and per share earnings through the successful implementation of our proven business plan. And now, Anna will provide you with greater detail on our results for the quarter and for the year.

Thank you, Sam. Normalized FFO, which excludes amortization and non-recurring items, with $13 million, or 21 cents per diluted share, for the second quarter of 2023, compared to $12 million or 22 cents per diluted share for 2022, resulting in a 5% per share decrease. Sequentially, normalized FFO increased from 20 cents for the first quarter to 21 cents in the second quarter, representing a 5% per share increase. We were able to obtain this increase in normalized FFO despite our operating results being largely impacted by our investments to grow the company through value-add acquisitions and developments, inflation, and rising interest rates on our short-term borrowings. UMH is well-positioned to grow FFO throughout the rest of the year as we increase occupancy and revenue. Rental and related income for the quarter was $47.1 million compared to $42.2 million a year ago, representing an increase of 11%. This increase was primarily due to recent community acquisitions, the addition of rental homes, and an increase in rental rates. Community operating expenses increased 6% during the quarter. This increase was mainly due to our recent acquisitions as well as an increase in payroll, rental home expenses, real estate taxes, insurance, waste removal, and sewer expenses. Community NOI increased by 16% for the quarter from $23.3 million in 2022 to $27 million in 2023. Our same property results are trending in the right direction. It is important to note that while total community operating expenses were up 6%, same property operating expenses were only up 4.2%. Same property income increased by 9%, generating same-property double-digit percentage NOI growth of 12.6% for the quarter. As we turn to our capital structure, at quarter end we had approximately $727 million in debt, of which $445 million was community-level mortgage debt, $182 million was loans payable, and $100 million was our 4.72% Series A bonds. 75% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 3.88% at quarter end compared to 3.77% at quarter end last year. The weighted average maturity on our mortgage debt was 5.2 years at quarter end and 4.9 years at quarter end last year. The weighted average interest rate on our short-term borrowings is 7.42% as compared to 3.69% last year. In total, the weighted average interest rate on our total debt is 4.88% compared to 3.92% last year. We continue to explore opportunities to raise lower-cost capital to pay down our short-term borrowings which would result in increased earnings per share. Subsequent to quarter end, we paid down our floor plan lines to approximately $4 million. These lines had a weighted average interest rate of 8.8%. At quarter end, UMH had a total of $265 million in perpetual preferred equity. Our preferred stock combined with an equity market capitalization of a billion dollars and our $727 million in debt results in a total market capitalization of approximately $2 billion at quarter end. During the quarter, we issued and sold approximately 2.9 million shares of common stock through our common ATM programs at a weighted average price of $15.61 per share, generating gross proceeds of $45.1 million and net proceeds of $44.2 million after offering expenses. Subsequent to quarter end, we issued and sold approximately 2.1 million shares of common stock through our common ATM program, generating growth proceeds of $34.8 million and net proceeds of $34.3 million after offering expenses. Additionally, we issued and sold approximately 712,000 shares of our Series D preferred stock through our preferred ATM program at a weighted average price of $21.85 per share, generating gross proceeds of $15.6 million and net proceeds after offering expenses of $15.3 million. Subsequent to quarter end, we issued and sold approximately 351,000 shares of our Series D preferred stock through our preferred ATM program, generating growth proceeds of $7.6 million and net proceeds of $7.5 million after offering expenses. In May, we entered into a $25 million term loan with First Bank, The term loan has a five-year term with a fixed interest rate of 6.15%. The term loan is secured by rental homes and their leases in various communities throughout our portfolio. Additionally, we entered into a new $25 million line of credit secured by rental homes and their leases. This new line of credit also has a five-year term and has a variable rate tied to prime. We view this as a good short-term source of capital to invest in our rental program until we are able to secure long-term capital at more advantageous rates. We are pleased to have another line secured by our rental units. Subsequent to quarter end on July 19th, the company expanded its revolving line of credit with Ocean First Bank from $20 million to $35 million. Interest is at prime with a floor of 4.75%. This line is secured by the company's eligible notes receivable. The amendment also extended maturity date to June 1st, 2025. From a credit standpoint, we ended the quarter with our net debt to total market capitalization of 34.3%, our net debt, the securities to total market capitalization of 32.4%, our net debt to adjusted EBITDA of seven times, our net debt less securities to adjusted EBITDA of 6.7 times. Our interest coverage was 2.5 times and our fixed charge coverage was 1.8 times. From a liquidity standpoint, we ended the quarter with $41.5 million in cash and cash equivalents and $80 million available on our unsecured revolving credit facility with an additional $400 million potentially available pursuant to an accordion feature. We also had $99.7 million available on our other lines of credit for the financing of home sales and the purchase of inventory and rental homes. Additionally, we had $36.7 million in our REIT securities portfolio unencumbered. This portfolio represents only approximately 2.1% of our undepreciated assets. We are committed to not increasing our investments in this REAP securities portfolio and have, in fact, sold certain positions. We are well positioned to continue to grow the company internally and externally. And now, let me turn it over to Gene before we open it up for questions.

UMH is well positioned to succeed now and into the future. We have built a first class portfolio of manufactured housing communities that profitably provide the nation with much needed affordable housing. We own 135 communities containing 25,700 developed home sites. We have built this portfolio asset by asset and made the right investments and improvements to provide a durable income stream that is resilient during recessions. We have both internal and external growth opportunities through the infill of our vacant sites, expansion of our communities, and development of new communities. Additionally, we have a profitable sales and finance company that should grow in the future. We view ourselves as an important piece of the affordable housing solution. We have a product and model that has proven to work time and time again. ULMH deploys capital into projects that take time to come online and become profitable. At any given time, we have $100 million or more invested that is not yet income producing. This results in a lag in earnings. It's important to recognize that earnings per share are an important metric, but not the only important metric. Our real estate continues to increase in value. As our real estate increases in value, we should be able to recapture this trapped equity through refinancing. Our business model reflects our aspiration that over 12 years our assets may double in value, and if we assume 50% leverage, our equity could triple in value. These potential gains are not reflected in today's financial results. Investing in real estate takes time to produce results, but we have a 55-year history of executing on this business plan. We are an industry leader with a platform that delivers best-in-class results. We look forward to generating increased earnings per share and a growing stock price while at the same time providing quality, affordable housing for our residents.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using your speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then 2. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Rob Stevenson with Jannie. Please go ahead.

Good morning, guys. Can you talk about how the home sale business is trending? I mean, third quarter is usually fairly similar to second quarter, and then you have some seasonality over the winter quarters. But is that still holding given financing rates and the pricing of alternative housing? How should we be thinking about that as we trend into the back half of the year?

Yeah, we're very confident in our ability to continue to generate the sales we've done over the first and second quarters. We're sitting here with a $3 million pipeline of homes for sale, so we believe we're on track to put up similar results that we did in the second quarter. We're getting the margins that we expect, which is generally a 30% gross markup, and demand appears to be strong across the portfolio. Our internal financing is really allowing us to continue to drive these sales as we're financing most of our home sales at a 7.5% interest rate. where most of the competition in that market is 9%, 10%, 11%.

Okay, that's helpful. And then can you talk about what condition the Maryland acquisitions are in? Are these the typical under-occupied assets that you'll need to move out some homes and improve the condition? Or are these some of the better quality stabilized assets that you've bought a couple of recently that you'll bring rental homes in and better management to, et cetera? How are they characterized?

Yeah, so it's a little bit of both. This isn't as much of a heavy lift as some of the previous acquisitions we've done. So it's 191 sites. 49 of those sites are very high quality multi-section homes perpendicular or parallel to the street. I'm sorry. And then the other community, which is a neighboring community, is about 142 sites. And that one will require some value add, your typical home removal, capital improvements, and rental home infill. So The combination of both of those allow us to get a portion of it stabilized and allow us to generate some of the long-term growth opportunity that we've seen before.

And are those third quarter acquisitions at this point?

There is a loan assumption involved, so it's hard to say exactly. I would say it's more likely the fourth quarter.

Okay, that's helpful. And then last one for me. So same store operating expenses, you know, Anna talked about is it growing there, you know, but revenue more. So year to date, they're up five and a half percent. What level of expense growth are you expecting in the back half of 23? Is it a sort of similar amount to this five and a half? Is there something that's increasing, decreasing where you had more expenses or less expenses in the first half of the year that all hit? Anything that we should be aware of there?

Sorry, this is Anna. I think that it will increase maybe a smidgen, but it will be in the range of inflation. So I would think it would be around the 6% range, give or take.

And Sam here, and I think now is a good point to mention the decline in the expense ratio. And because we're up to about 87% occupancy, the additional occupancy of rental homes and the home sales you know, should be highly accretive, should be reducing the expense ratio because, you know, this is additional income to communities that have, you know, predominantly fixed costs. So between that and the expansion sites that we've invested significant sums in, both the expansion sites and the Sebring project so that, you know, we do have over $100 million in assets that are not currently earning income. but they have the room to earn that income as we sell homes into the expansions and the new developments and as we rent homes. So all of that means that we have substantial ability to increase the operating income.

And you do see the expense ratio reduction in the same property numbers because you see that for the three months, As of June 30th, 2023, it was 40.1. And last year at this time, it was at 42%. So it was a nice decrease in the expense ratio.

What's the pace that you guys are running at currently in terms of monthly vacant rental rented and sort of absorbing the vacancy in the rental home portfolio right now?

Well, we'll answer that in one second, but I just wanted to tell you, Amazingly, from June 2022 to date, we added 775 rental homes, of which 668 are occupied. So we look at that as the equivalent of we built and filled a 668-unit apartment complex, which is a pretty incredible achievement. And now, Brett, you can answer that.

Yeah, absolutely. So for the first six months of the year, we converted 614 new homes from inventory to rental units. realized that the number in the SUP is 534, but that also includes some rental homes that were sold during the quarter. So new inventory that was actually converted with 614 homes. Additionally, we filled another 127 homes in July. So we were averaging over 100 homes per month, and that includes the slow first quarter, which is obviously the winter, and it's seasonal, as you mentioned earlier. So we're on track to meet that goal of filling 100 homes a month. Our inventory is down to 550 homes now. which is much closer to where it historically has been. Additionally, as Anna mentioned in her portion of the script, and I believe Sam as well, we paid down our floor plan almost to zero at this point, correct?

Correct. I mean, we had paid it down to only $4 million, and then as of today, we're pretty much down to zero.

And then I guess one other question from that, how aggressive are you guys in putting new orders in these days? I mean, what do you have like on order that hasn't been delivered thus far that's, you know, that you're going to have to spend on or is the catch up in the production for the builders allowed you to reduce that substantially as you go through here?

Exactly. Things are back to normal in terms of, you know, most communities probably shouldn't have more than five homes in inventory. There's exceptions where sales and rentals are much faster, so you might have 10 homes in inventory, but never again will we have 1,000 homes in inventory. And the proper number is probably below 500 homes, and we're approaching that right now.

Correct. And just to add a little bit to that, so we... We have 550 homes in inventory right now. Every month that we fill 100 homes, it's basically another $100,000 in revenue. You add our rent increases on top of that, and our monthly rent roll is growing anywhere from 125 to 175 a month. As to the question, we have been ordering some homes, but only at communities with very strong sales that have filled all of their rentals. So we've ordered less than 75 new homes this year. And to the other part of that question, the backlogs, are in the four- to five-week range, with some factories in the six- to eight-week range. So things are much easier to get just-in-time inventory, which will stop us from having such high inventory levels in the future.

But, Eugene, lady chairman, for the benefit of our loyal manufacturers, our policy is to do 800 to 850 new homes a year. And for 2024, we're very hopeful we'll get back on that. and we'll be giving them the type of orders we have in the past.

All right, guys. Thanks, and thanks for the eclectic whole music today. First time I'd heard Roger Miller in quite a long time.

And our next question will come from Keegan Carl with Wolf Research. Please go ahead.

Hey, thanks for the time, guys. So, Sam, you mentioned carefully weighing year-term dilution versus long-term accretion. Just kind of curious, how many opportunities have you guys passed on in the last several quarters due to financing headwinds, and how should we think about your external growth going forward from here?

We pass on opportunities all of the time and substantial opportunities all of the time. The remainder of the question was in terms of Future growth, really. And how do we weigh that with short-term dilution? So if you look at the acquisitions we did the last three years, because our business plan is it takes time, those will become more accretive next year. But they're doing fantastically. I have a document in front of me that shows me Ohio in the past 12 months, we've you know, since January 1st, increased occupancy, 148 lots. Indiana, 84 lots. Western Pennsylvania, 58 lots. South Carolina, which is a new place, 37 lots. Alabama, 48 lots. Michigan, 21 lots. So, you know, these acquisitions do very well, but again, nothing's immediate. And so we have to balance, you know, how many dollars are we going to put out How much are we going to increase expenses from the prior owner? How much are we going to reduce occupancy? How long will it take us to turn it around? Every acquisition out there, I believe, will be good in seven years. If you have that kind of time horizon, you can make any of them good. But if you're trying to do it in three to five years, it limits what you should acquire. But we do believe more acquisition opportunities will come to us. But also recognize we have over 2,000 vacant lands, 2,000 acres of vacant lands adjoining our communities. And looking at that today, some places we fought expansion battles to get those approved as manufactured housing, such as Vineland, New Jersey, and Greenwich Township, Pennsylvania, near Allentown. And probably because of the significant shortage of housing, the best bet is to stop fighting to get manufactured home lots approved and just zone it one acre residential and sell it. So we're working on that to make some of the assets that are not currently earning income to make them productive for us. Because we have 2,100 vacant acres not earning anything. We have 12% vacancy that we intend to fill. And I think we have $200 million invested in vacant rental homes, expansions, and other things that are not yet earning money. So we have all of those internal things to grow and we're trying to balance that issue with acquisitions. Occupancy is down at 87%, that doesn't leave us enough runway. We have to find more acquisitions with vacancies and get more lots built for the future.

Gene, I'm Eddie Chairman. Our mission statement is for the entire industry is to build 500 new communities a year of 200 units per community. That's 100,000 units. The manufactured housing industry can double its production and provide 100,000 units. And that would be just the beginning of helping to solve the affordable housing crisis. And that crisis is one that must be solved. And so we're doing everything in our power to be able to grow our company and to build these additional homes. We hope to get some legislative help, and we hope to get some help from the investors who are socially conscious. UMH is a social investment and an important contributor to solving the affordable housing shortage.

Thanks for the color there. You know, it's good to see your same-store revenue growth outpacing expense growth, which obviously is an ROI margin expansion. I guess, how should we think about that in the balance of the year? I mean, obviously, there's some seasonality in the business as far as the ramp-up and occupancy and then the decline. And I guess, how much of this is attributed to operational efficiencies versus you just kind of adding homes onto your platform and more or less solving for the top line?

Yeah, I think that, as we indicated earlier this year, that as we continue to fill our vacant rentals, as we continue to stack quarter on quarter of occupancy growth, you compare that to last year's numbers where we had very minor improvements in overall occupancy and revenue growth, that we should be able to continue this growth throughout the rest of the year. And as we get into next year, and order 800 new homes and begin to fill those that, you know, we believe that this growth is sustainable. We've always thought that we should be in the high single-digit NOI growth. We're very happy with our double-digit NOI growth for this quarter and see no reason to believe that that should slow down anytime soon.

When we have those 1,000 homes in inventory, that's 1,000 homes we have to heat, 1,000 lots we have to cut the grass, and as they fill, instead, the residents heating them and the residents cutting the grass, and now they're earning revenue. So that reduces your expense growth pretty dramatically.

Yeah, I guess just on the seasonality, right? Like obviously peak moving seasons kind of ending in this range. So is it fair to assume that that gap will close between, you know, can we expect some NOI margin contraction from where this quarter is at kind of through the back half of the year? Is that how you're thinking about it internally? Not at all, not at all.

Number one, when you talk to the managers, there's waiting lists for rental units everywhere. And just like we have a 7% increase in rental home revenue, I ask them the question, when the rental home becomes vacant, can you increase the rent more than just the normal 5%? And not all, but almost all of the managers say yes, which means, you know, on those rental homes, you're going to get growth over 5%. And then again, I consider that ratio operating expense ratio extremely important because that's your profitability and you can look at the supplemental and you'll see the high percentage occupancy in most of our communities. So, as those high percentage occupancy communities go from eighty six to a hundred percent, almost all of that revenue, you know, seventy percent of that revenue should make it to the bottom line. And then you have the communities that at this moment are difficult, and they're the communities, you know, one of them has, you know, 1% occupancy. Some of them have 30% occupancy, 55% occupancy. But we purchased them that way, knowing we'd fill them, and we, in fact, are filling them. And so that investment is not currently earning money. but as it fills up, it'll hit a break-even point, and then it'll become profitable. And those communities 87% occupied or more, every new unit is like 70% additional profit. So we're in an extremely good position for, and just along that exact same line, what you're seeing now is the green shoots. We didn't have the homes, until approximately January 1st. We started to really fill them about January 1st. So you're not going to have 12 months of revenue from them until later. So that 12 months of revenue is going to be even more accretive than it has been the past six months.

And that's what I was getting at earlier with my point about stacking quarters. As we get to the fourth quarter, which, as you pointed out, is seasonally a little bit slower, we expect to fill rental units and continue to reduce our inventory. But you'll have the rent roll growth that we achieved during the first, second, and third quarters, which are helping to boost that fourth quarter number as well.

Got it. Just one more here. I know you mentioned the waiting list. Just kind of curious where your top of funnel demand is today versus this time last year, just to get a better feel for where true demand levels are at.

The demand is through the roof. Last year, there was no shortage of demand. Demand was still very strong, but we didn't have homes. This year, we have homes in place. They're ready for occupancy, and we're able to capture that demand and turn them into move-ins and increased revenue. So I personally don't think demand has been stronger, specifically on the rental front, but obviously we're very pleased with our sales as well.

That's a good point to mention. UMH has an incredible team at the home office and out in the field. We refine and improve our marketing all the time. We have our drone videos. We review which communities have vacancies, where applications might be slower than we'd like, and then we adjust the marketing and it immediately improves. So there's an incredible team here working all the time to increase sales, increase occupancy, increase profits, and everybody out in the field and in the office is doing a fantastic job doing that.

Got it. Thanks for your time, guys.

Again, if you have a question or a follow-up, you may press star then 1 to join the queue. Our next question here will come from Craig Kuchera with B Reilly. Please go ahead.

Hey, good morning, guys. I think earlier in the year, you had a goal, I believe, of deploying about 1,000 rentals this year, and you're running ahead of that year to date at 534. Is that still a reasonable target

Yes, we believe that we can accomplish that. And as I mentioned earlier, that also includes some sales of older rental units. So for the first six months, we've converted 614 new homes from inventory into new occupied rental units. And in July, we did another 127. So we're very close to accomplishing that goal, and we're still in our peak season. I think that I don't want to guarantee we'll get to 1,000, but I certainly think we'll get very close to 1,000 and we'll be well-positioned to be more confident in some of the orders we make next year to try and accomplish that again.

Got it. I know you haven't been as active in buying homes year-to-date, but last quarter I think you mentioned that the pricing environment had slipped and maybe it dropped 10% or maybe even more. Is that trend continuing today?

Sam here. So we're going to something at Clayton Homes next week. You know, they have a net zero energy house. They're working on putting solar panels on the homes. They're working on constant improvements to factory efficiency. And, you know, because of inflation, it's hard to say they'll reduce the cost, but they're doing everything in their power to control the costs of the houses. So we feel very confident we will remain the best value per square foot that there is in housing.

Great. And Sam, you had mentioned several times in your opening commentary that you're looking to become more of a national platform. I know you've gone, I believe, as far west as Memphis, but is the natural move for you guys to go someplace kind of contiguous in the portfolio, maybe Kentucky or North Carolina, or are you maybe potentially evaluating markets further west?

What COVID proved to us is that the rental manufactured home in a community is the best form of rental housing for people earning from $40,000 to $80,000. And they could be earning more than that, but we're probably the only thing available that, you know, meets the requirement of 30% of your income covering your housing costs for household income $40,000, you know, to say $60,000. And that model will work anywhere because anywhere someone tries to build apartments or if you look at the quality of older apartments, putting brand new homes in a community and renting them out is better housing at a better price. So knowing that this will work anywhere we want to go anywhere, we're well aware of how difficult it is to buy land and get approvals. We're trying to let all outside developers know they can get the land, get the approvals, sell it to us, fully approved or sell to us after they build it because we're highly confident we could add these homes as rental units and fill it. And also, we like the turnaround properties, but we have to keep our eye on how many can we do without negatively impacting FFO because it does take three years. So we watch all of those things. And I should add, we're becoming more confident and proving more ability to fill these homes faster than we thought we could. So if you're talking about building a community, you consider four sales per month as good, 48 units per year you consider successful. Well, there's communities where we do 100 rental homes in a year. And if that's the case, that means we can do more projects, expecting ourselves to turn them around quicker, which will make more projects more attractive to us in other states.

As to our geographical designs, we have a good strategy that's been working. Very proud of having picked Nashville and Memphis, and now we're going into Florida. And we have the greatest migration in the United States' history to the southeastern part of the United States. So we have expansion plans, and we pick our areas very carefully. And to date, we've been successful in picking areas that will overperform the other areas. Actually, though, the housing shortage is so great that it's hard to find an area that doesn't need affordable housing. But we still want to be where the action is, where the new factories are going. We believe both in affordable housing and workforce housing. And we want to build our parks where the population is growing faster.

Okay, great. And you had mentioned how you're raising renewal rents, I believe 5%. Most of your managers say they could raise them quite a bit more. Can you give a sense of how tenant retention is trending?

Well, let me clarify that because I want to answer that exactly like you asked it. On resident-owned homes or existing people in rentals, we do not want to raise the rent more than 5%. We believe that creating that customer loyalty and that word of mouth has incredible value. And that's why we have waiting lists and that way we can fill communities. So on those, we don't want to go forward more than 5%. And in fact, when someone buys a new home from us, they get a long-term lease matching the loan saying rent won't increase more than 5% or CPI, but we net out water, sewer, taxes, garbage, the things that come up the most. So we're proud that our operating income went up so much with just a 5% increase to our existing residents. Now on the rental home turnover, that can go to market and the same with vacant lots. So that's why on the rental homes, we have the full 7% increase in rental revenue because there we increase the rents to market. But on existing, we really tried to limit that to the 5% increase.

Yeah, and about 30% of our rental units turn over annually, 60-plus percent of our residents stay more than two years, and 40% of our residents stay more than three years. That number has remained pretty solid over the past few years.

All right, terrific. Thanks.

This concludes our question and answer session. I'd like to now turn the conference back over to Samuel Landy for 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, Jean, Anna, Brett, and I are available for any follow-up questions. We look forward to reporting back to you in November with our third quarter 2023 results. Thank you.

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