Good morning, and welcome to UMH Properties Third Quarter 2018 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 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 third quarter supplemental information presentation. The supplemental information presentation along with the 10-Q are available in the company's website at umh.reit. I would like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations, and involve various risks and uncertainties. Although, the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company's third quarter 2018 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 and 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. Good morning, everyone, and thank you for joining us. We are pleased to report that we are making progress in all aspects of our business. Our ability to identify and acquire value-add communities in markets with growing economies and improving demographics has resulted in exceptional income and earnings growth. Low unemployment rates and rising wages have created additional demand for our products. When we acquire a community there is a 3-year turnaround period, during which we complete deferred maintenance and capital improvement projects. As the improvements are completed, the communities become more desirable places to live. The improving economic climate paired with the completion of improvements at our turnaround communities is rapidly improving our community operating numbers, thus positively benefiting our earnings while generating significant long-term value for our shareholders. Our portfolio currently consists of a 115 communities, containing approximately 20,700 home sites, with an overall occupancy rate of 82.6%. We currently have approximately 3,600 vacant sites, most of which were acquired. This vacancy factor provides us with a significant runway to improve upon our already successful business plan. The most efficient way to fill the vacant sites and realize the value is to utilize the rental home program. We currently have 6,215 rentals, of which 93.3% are occupied. Demand for rentals is very strong in all our markets. We are on track to meet our annual goal of installing and renting 800 new homes this year. So far this year, we have added 608 rental homes to our portfolio. Our average monthly home rent is now $737, which is an increase of 2.5% over the prior year period. Sales demand is as strong as it has been since prior to the recession. Sales for the quarter were $4.7 million, as compared to $2.8 million…

Thank you, Sam. Core Funds From Operations or Core FFO was $7.1 million or $0.19 per diluted share for the third quarter of 2018 compared to $5.3 million or $0.15 per diluted share for the prior year period. Normalized FFO, which excludes realized gains on the sale of securities and other non-recurring items was $7.1 million or $0.19 per diluted share for the third quarter of 2018 compared to $4.9 million or $0.14 per diluted share for the prior year period. This represents a 36% increase on a per share basis. Normalized FFO was $20.1 million or $0.55 per diluted share for the nine months compared to $15.4 million or $0.48 per diluted share a year-ago, representing an increase of 15% on a per share basis. Rental and related income for the quarter was $28.7 million compared to $25.9 million a year-ago, representing an increase of 11%, primarily due to community acquisitions, the addition of rental homes and the growth in occupancy. We have been raising rental rates by approximately 3% to 5% at most communities. As Sam mentioned, our Same Property weighted average monthly site rent is currently $446, representing an increase of 3.5% from a year-ago. Community NOI increased by 14% for the quarter from $13.5 million in 2017 to $15.4 million in 2018. Community operating expenses for the quarter were 46.3% of rental and related income compared to 47.6% for the prior year period. For the nine months, our expense ratio was 46% compared to 47.1% for the prior year period. As we noted in the past, our expense ratios will continue to improve as occupancy rates rise and as we upgrade and integrate our acquisitions. As previously discussed, the adoption of a new accounting pronouncement required us to include the change in the fair value of…

Thank you, Anna. UMH is on its way to an excellent 2018. Our income growth is strong. Our overall operating metrics have improved. Sales, which has been experiencing double-digit growth throughout the year, increased an impressive 67% for the quarter. These positive results have enabled us to increase our Normalized FFO per share by 36% for the quarter and 15% for the nine months. The economy grew at a 3.5% rate in the third quarter and continues to benefit from a strong jobs market, modest wage increases, low unemployment and high consumer confidence, all of which are positive for housing demand. There is still an overall housing shortage. The U.S. is expected to build 1.2 million homes this year, short of the historical average of 1.5 million needed to keep up with population growth. However, recent conventional home sales have shown a decelerating growth rate due to higher home prices and rising mortgage rates. Pressure on conventional home sales highlight the inherent affordability and value of our homes. Furthermore, legislative initiatives, including the GSE's Duty to Serve program and amendments to Dodd-Frank Act, are favoring our industry. Legislation has been introduced in the Senate, which could potentially allow us to push back against discriminatory zoning. These initiatives, the demographic outlook and the improving economic backdrop bode well for a bright future for UMH and its shareholders. We will now be happy to take questions.

We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Rob Stevenson of Janney.

Good morning, guys. Last quarter, when we spoke, you had a similar sized pipeline adjusting for the $3.5 million acquisition that you completed during the quarter. And it was roughly expected that $33 million would close in the fourth quarter and the remaining over 2019. Is that still the case? And how far into 2019 are you expecting for that pipeline to close?

Yeah, that still is the case. We expect to close the deal here coming up in the next few weeks, and then we have two scheduled with closing dates for December that's actually about $35 million. And then as far as the 2019 closing, it looks like those are going to be Q2, Q3 possibly.

Right.

Okay. And then in terms of the sales of the homes, how much seasonality do you guys experience in that? I mean, normally the fourth quarter and the first quarter are traditionally poor in your markets for single-family sales, given the weather and everything else or less from a seasonal standpoint. How much seasonality from the home sales, do you guys experience these days?

Well, you're correct. The second quarter is generally the best quarter for sales. But at the same time, I'm saying that, the situations from 2006 to approximately three months ago was as bad as it could be for manufactured home sales. And that has improved dramatically, so that sales are coming back to what they were like before 2006. In fact, for October, sales were triple what they were a year-ago. So even though there is a seasonality, even though the second quarter is usually the best, sales are stronger than any time since 2016 right now, growing considerably.

Okay. And then last one, Anna, has there been any major changes in the composition of the securities portfolio? Or is it today it's largely the same sort of composition as what you guys have, I guess, disclosed on the K?

Right. It is predominantly the same. There was - there hasn't been many changes.

Okay. Thank you.

Thank you.

The next question will come from Craig Kucera of B. Riley FBR.

Hi, good morning, guys. Sam, on your comments regarding sales, I guess, clearly it seems that the new legislation is helping. Can you talk about what you're able to do now versus maybe what you were not able to do before that was enacted?

Well, the ability to discuss monthly payment, you had persons coming into buy a $70,000 house and they have $50,000 a year household income. If you can't discuss monthly payment, you can't sell them the house. And now we can again discuss monthly payment. On top of that, because incomes are rising for the blue-collar worker, we're experiencing more and more cash buyers. We do a customer satisfaction report, and we're getting the highest scores possible. So sales are just going phenomenally. And it's almost like we've been out of the sales business from 2008 virtually to date. UMH never imaged that industry shipments could fall as low as 40,000 in 2009. They're back over 100,000 and growing. But UMH is in great locations, and when I look at our states, and I look at our state with the highest sales, Pennsylvania [$3.6 million] [ph] in sales. The fact is one expansion or one sales center could do that. So we still have plenty of room to grow even though sales were up 60% for the quarter.

Got it. And do you have a sense - you got into renting both the land and the home in the last several years, because sales were so weak. I guess, given the size of your company now versus what it was kind of before you were renting homes, do you have a sense of kind of what sales would need to pick up to before you might sort of maybe get more involved in that and maybe draw back on the rentals? Or do you continue to think there will be ample demand for rentals as the cycle continues?

Right. We will continue to add 800 rental units a year, it's a great way for people who have never lived in a manufactured home community to experience it. The demand is there. It's a great starter home and then people move up and they buy houses, and we'll continue to use the rental program to generate new sales. I believe that we're just getting started at being a great, great home sale company. We have great people, great locations, marketing, fantastic product. We want to do more of land home sales, sales into other people's communities get more of our Street dealerships, becoming stronger one Street dealership could do [$3.7 million] [ph] in sales a year pretty easily. So there's plenty of room to grow this, and we have a great staff that's getting better and better.

And circling back to the acquisition pipeline, appreciate the color on timing, but as far as 66% occupied, do you have a sense of sort of what your initial yield will be on those? Has that changed at all from where we were a quarter or two ago? And can you kind of update us on your expectations there?

So looking at the pipeline, these communities are better quality than a lot of the communities we've done in the past. These are underwritten in about 6.25% cap rate going in. Most of the work has already been completed. The CapEx has been done along the way. So we're really going to be putting in rental homes, minimal cleanup, so we should be able to grow our yield pretty quickly.

Got it. So it sounds like you're not going to have sort of that natural margin drag from this round of acquisitions. Is that fair to assume?

Yes.

Okay. And one more for me, I guess, now that you're having to report your fair market value of your securities every quarter in your net income, and I know you back it out in your FFO calculation. But would it be possible for you guys to report sort of quarterly what your positions are so that the investor base has a better sense of what the impact will be? Because it is impactful to your net asset value, at least as we calculate it. Anyway, I just thought I'd request that, if possible, to be in your Q or your supplement, if possible?

Well, that's an interesting suggestion. I'll consider it. But as Anna pointed out, we view the securities portfolio as liquid real state, and we don't change our views from day-to-day, month-to-month, quarter-to-quarter. So we hold positions for decades. And so that's the reason we usually publish it year-end. But I will consider whether - now that the markets have gotten so volatile, maybe we should publish quarterly. And I appreciate the suggestion.

Thank you.

The next question comes from Brendan Wagner of Montag Wealth.

Hi. Thanks for taking my call. And it's great to see results like we're having on the home sales. I like to see the ASP up and gross margin seems terrific, congrats. My question is specifically for Anna. Anna, I was wondering and we chatted about it in the past, but if you could help me understand the rationale on why you're okay with it as the CFO to be investing in the REIT portfolio to the extent you do. Because when I see the Indiana property, and it's just the bread and butter of what you guys do, it's terrific, so I don't understand the concept of allocating capital to improve business models, which is a good piece of the REIT portfolio, not the entirety, of course. But could you give me some color on that, because myself and my client were curious as to that. Thanks.

Okay. As Gene has mentioned, we consider the REIT portfolio as liquid real estate. We use that portfolio in - for liquidity - primarily for liquidity purposes. In the past, when we had acquisitions and we didn't have the total funds. We were able to take down some of the securities portfolio and purchase the acquisitions. Additionally, when we have money that comes in, we put it back into the securities portfolio. Sometimes, we can raise money at times when we don't have the useful funds, so it is a good way of storing capital.

I'd add. This is Samuel. In our 10-Q, you'll see that the results from the REIT securities portfolio have generated $60 million in dividends and realized gains. So our stock prices fluctuate from time-to-time. The long-term history is that we have $60 million in dividend and realized gains.

Additionally it's only about 10% of our total market capitalization.

Thank you for the color. And I do appreciate that the [Technical Difficulty] my quick follow-up is, I know where [Technical Difficulty]…

I'm sorry, you're breaking up.

Yes. Oh, I'm sorry. [Technical Difficulty]

Brendan, we can't hear you.

Mr. Wagner?

I'm sorry. I'm sorry. I'll follow up.

Thank you.

Okay.

Oh, can you hear me?

Yes.

Sorry. My question was what percentage of the Core FFP is coming from dividends on the REIT portfolio, including dividends from - looking back from [GOV, SIR, and CPL] [ph]? And will that - the knockdown in those dividends, will that impact your dividend paying ability?

You're breaking up again. I don't know what phone you're using.

Okay. I'm sorry. I'll follow-up offline.

Okay. Thank you.

Okay. Thank you.

The next question comes from Merrill Ross of Boenning.

Hi, good morning. I'm wondering about the 800 rental target that you have. And given the returns and value creation from that program, would you have the capability to increase that run rate from 800 to, say, 900 or a 1000 in the future?

Yes. We have that ability. What we do is, we had pretty much 5 rentals per community and see how quickly they rented out. In some cases we had 15 rentals and see how quickly they rented out. So we're watching that all the time, we predicted 800 for 2018 and it looks like that's going to be the number. But as demanding increases, we do have the ability to go faster.

Great. Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

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