Umh Properties, Inc. Q2 FY2023 Earnings Call

Good morning, and welcome to UMH Properties Second Quarter 2023 Earnings Conference Call. Please note that this event is being recorded. It is 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 Chew, Executive Vice President and Chief Financial Officer; Brett Taft, Executive Vice President and Chief Operating Officer; Jim Lykins, 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 $0.20 per share in the first quarter to $0.21 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 1, 2023, rent roll is now 7.5% higher than it was on January 1, 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 30, 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 $0.21 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 the 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 versus 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 required 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 nonrecurring items, was $13 million or $0.21 per diluted share for the second quarter of 2023 compared to $12 million or $0.22 per diluted share for 2022, resulting in a 5% per share decrease. Sequentially, normalized FFO increased from $0.20 for the first quarter to $0.21 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 will 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 $1 billion 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 program 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 gross 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 C preferred stock through our preferred ATM program, generating gross 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 FirstBank. The term loan has a 5-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 5-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 19, the company expanded its revolving line of credit with OceanFirst 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 the maturity date to June 1, 2025. From a credit standpoint, we ended the quarter with our net debt-to-total market capitalization of 34.3%, our net debt less securities-to-total market capitalization of 32.4%, our net debt-to-adjusted EBITDA of 7x, and our net debt less securities-to-adjusted EBITDA of 6.7x. Our interest coverage was 2.5x and our fixed charge coverage was 1.8x. 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 REIT 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 homesites. 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 for 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. UMH 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 its 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.

And our first question here will come from Rob Stevenson with Janney.

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 trended in the back half of the year?

Yes. 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 are 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 tell me 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 you've bought a couple of recently that you'd bring rental homes in and better management to, et cetera? How are they characterized?

Yes, so it's a little bit of both. This isn't as much of a heavy lift than 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 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 allows 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, Anna talked about, is it growing there but revenue more. So year-to-date, they're up 5.5%. What level of expense growth are you expecting in the back half of '23? Is that a sort of similar amount to this 5.5%? Is there something that's increasing, decreasing where you had more expenses or less expenses in the first half of the year that will 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 should be highly accretive, should be reducing the expense ratio because this is additional income to communities that have 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 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 30, 2023, was 40.1%, and last year at this time, it was at 42%. So it was a nice decrease in the expense ratio.

What is the current pace of monthly rentals and how is the absorption of vacancy in the rental home portfolio going?

We'll answer that in 1 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.

Yes, absolutely. So for the first six months of the year, we converted 614 new homes from inventory to rental units. I do realize that the number in the supplemental is 534, but that also includes some rental homes that were sold during the quarter. So new inventory that was actually converted was 614 homes. Additionally, we filled another 127 homes in July. So we are 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 0 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 0.

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 an order that hasn't been delivered thus far 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 most communities probably shouldn't have more than 5 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 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, our monthly rent roll is growing anywhere from $125,000 to $175,000 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 the 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 4- to 5-week range with some factories in the 6- to 8-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.

For the benefit of our loyal manufacturers, our policy is to do 800, 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.

Our next question will come from Keegan Carl with Wolfe Research.

Sam, you mentioned carefully weighing near-term dilution versus long-term accretion. Just kind of curious how many opportunities have you guys passed on 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?

In the last three years, the acquisitions we've made are expected to become more beneficial next year as our business plan requires time for returns. Currently, they're performing very well. For instance, in Ohio, we've increased occupancy by 148 lots over the past 12 months; in Indiana, we’ve added 84 lots; Western Pennsylvania saw an increase of 58 lots; South Carolina, a new location, added 37 lots; Alabama gained 48 lots; and Michigan added 21 lots. These acquisitions are thriving, but results aren’t immediate. We need to carefully evaluate how much capital we intend to invest, the rise in expenses from previous ownership, the potential drop in occupancy, and the timeframe for turnaround. I believe every acquisition will yield positive outcomes after seven years. If you can think long-term, you can make any acquisition successful. However, aiming for successes within three to five years may restrict your options. We’re confident that more acquisition opportunities will arise, but we should also acknowledge that we have over 2,000 acres of vacant land integrated with our communities. Currently, we've faced challenges in getting approvals for manufactured housing in places like Vineland, New Jersey, and Greenwich Township, Pennsylvania. Given the housing shortage, the better strategy may be to stop pursuing manufactured home lots and instead zone for 1-acre residential lots and sell those. We're focused on making our non-income earning assets productive, especially since we have 2,100 acres that aren’t generating revenue. We also face a 12% vacancy rate that we aim to address. We've invested approximately $200 million in vacant rental homes, expansions, and other projects that aren't yet yielding returns. Balancing these internal growth initiatives with acquisitions is crucial as our current occupancy is at 87%, which doesn't provide sufficient runway. We need to pursue more acquisitions with vacancies and work on building more lots for the future.

Our mission statement for the entire industry is to build 500 new communities a year, with 200 units in each community, totaling 100,000 units. The manufactured housing industry has the potential to double its production and provide 100,000 units, and this would be just the beginning of addressing the affordable housing crisis, which is a critical issue that needs resolution. We are committed to doing everything possible to grow our company and construct these additional homes. We are seeking legislative support and assistance from socially conscious investors. UMH represents a social investment and plays a vital role in tackling the affordable housing shortage.

And I guess it's good to see your same-store revenue growth outpacing expense growth, which obviously is NOI 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 in occupancy and then a 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?

Yes. 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 and 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, 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 are heating them and the residents are cutting the grass and now they're earning revenue. So that reduces your expense growth pretty dramatically.

Yes, regarding seasonality, the peak moving season is coming to an end. Can we expect the gap to close, or anticipate some NOI margin contraction from this quarter through the second half of the year? Is this how you are considering it internally?

Not at all. First of all, when you speak to the managers, there is a waiting list for rental units everywhere. Just like we've seen a 7% increase in rental home revenue, I asked them if, when a rental home becomes vacant, they can increase the rent by more than the usual 5%. Almost all of the managers responded yes, indicating that for those rental homes, we can expect growth exceeding 5%. Additionally, I find the operating expense ratio to be extremely important as it reflects profitability. You can refer to the supplemental data to see the high occupancy rates in most of our communities. As these high occupancy communities improve from 86% to 100%, nearly all of that income, around 70%, is likely to contribute to the bottom line. There are some communities currently facing challenges, including one with just 1% occupancy, while others have 30% or 55%. We acquired these properties aware of their condition and are in the process of filling them. Although they are not generating income yet, once they reach stabilization, they will become profitable. For those communities that are 87% occupied or more, every new unit contributes about 70% additional profit. We are in a very favorable position, and in line with this, we are starting to see positive signs. We didn't have the homes available until around January 1, and we began to fill them around that time. Therefore, we won't have a full 12 months of revenue from them until later, making that future revenue even more beneficial than it has been in 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.

Yes, 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 increase 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 what 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 profit, and everybody out in the field and in the office is doing a fantastic job doing that.

Our next question will come from Craig Kucera with B. Riley.

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 we can achieve that. As I mentioned earlier, it also involves selling some older rental units. In the first six months, we've converted 614 new homes from our inventory into occupied rental units. In July, we added another 127. We're very close to reaching that goal and we're still in our peak season. While I can't guarantee we'll hit 1,000, I think we'll come very close. This positions us well to be more confident in our orders for next year to try and achieve that again.

Got it. And just 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?

This is Sam here. So we're going to something at Clayton Homes next week. 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 because of inflation, it's hard to say they'll reduce the cost, but they're doing everything in their power to control the cost 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 meets the requirement of 30% of your income covering your housing costs for a household income $40,000 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 it 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 3 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 4 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. You mentioned that you're increasing renewal rents by 5%. Most of your managers believe they could increase them significantly more. Can you provide an update on the trend in tenant retention?

Well, let me clarify that because I want to answer that exactly like you asked it. On resident-owned homes or existing people and 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, in that way we can fill communities. So on those, we don't want to go forward more than 5%. In fact, when someone buys a new home from us, they get a long-term lease matching the loan, saying that 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 increased the rents to market. But on existing, we really try to limit that to the 5% increase.

Yes. 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 remains pretty solid over the past few years.

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, Gene, 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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