Earnings Call Transcript - UMH Q3 2021

Operator, Operator

Good day and welcome to the UMH Properties Third Quarter 2021 Earnings Conference Call. Please note this event is being recorded. It is now my pleasure to introduce your host, Ms. Nelli Madden, Vice President of Investor Relations. Thank you. Ms. Madden, you may begin.

Nelli Madden, Vice President of Investor Relations

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 our 10-Q are available on 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. 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 2021 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; Brett Taft, Vice President and Chief Operating Officer; Jim Lykins, Vice President of Capital Markets; and Daniel Landy, Vice President. It is now my pleasure to turn the call over to UMH’s President and Chief Executive Officer, Samuel Landy.

Samuel Landy, President and CEO

Thank you very much, Nelli. We are pleased to report our third quarter earnings results. Normalized FFO for the third quarter was $0.23 per share, as compared to $0.18 per share last year. This represents an increase of approximately 28% over the same quarter last year. For the first nine months of the year, normalized FFO was $0.65 which is an increase of 30% over last year. This is the sixth quarter in a row that UMH has maintained or increased normalized FFO per share. Our business plan of acquiring undervalued communities, making the necessary improvements, and implementing aggressive rental sales and marketing programs has been extremely successful. Not only have we generated increased earnings for our shareholders, but we have also provided countless residents with high-quality affordable housing that previously was not obtainable for them. An investment in UMH is an investment in providing affordable housing. The results that we have reported quarter-after-quarter are starting to be recognized by the public markets. We have achieved an equity market cap of over $1 billion and growing. Our access to capital at attractive rates has never been better. This reduced cost of capital through both the equity and debt markets will allow us to drive additional FFO growth through investment internally and externally. It will also help us redeem our outstanding $247 million of series C 6.75% preferred stock in July of 2022 and $215 million of our series D 6.375% preferred stock in January of 2023. Reducing our cost of capital on these preferred series could result in an additional $0.20 to $0.30 per share, depending on the percentages and rates of equity and debt utilized for the redemption. The redemption of our preferred stock combined with our ability to continue to grow earnings organically and increased property values positions UMH to outperform in the coming years. Total income for the quarter increased 11% over last year to approximately $48 million. This increase was the result of an 11% increase in rental and related income and a 15% increase in sales of manufactured homes. Our operating expense ratio improved to 41.8% from 44.7% last year. Our same-property results remained strong. For the quarter, same-property occupancy was up 190 basis points or 435 units over last year. Sequentially, same-property occupancy increased by 44 units. Same-property NOI increased 14.9% or $3.1 million as compared to the third quarter of 2020. Year-to-date same-property NOI increased 14.7% or $8.9 million as compared to last year. This is the eighth quarter in a row that we have achieved double-digit same-property NOI growth. During the quarter, we added 96 homes to our rental portfolio, bringing our total portfolio to approximately 8,700 rental homes. At quarter end, our rental home occupancy rate was 95.1%. The rental home business has continued to meet our expectations. Demand for rental units throughout our portfolio remains robust. The availability and price of inventory remains our biggest concern. Home prices are up approximately 40% from pre-COVID levels. We are aggressively ordering inventory and have inventory being delivered throughout the portfolio. As our manufacturers open additional factories and increase production, we will be able to obtain more homes and fill sites at a pace that is in line with previous years. Gross sales for the third quarter were $7.8 million, representing an increase of 15% over last year. Year-to-date sales volume is at $21.8 million, representing an increase of 45% over last year. Year-to-date, our income from sales is approximately $1.5 million as compared to $445,000 last year. We are happy to report that we have broken our annual sales record that was set last year of $20.3 million in just the first three quarters of this year. This year, we have sold a total of 294 homes, of which 153 were new home sales and 141 were used home sales. Our average sales price was $74,000 as compared to $60,000 in the prior year period. We financed 61% of our home sales, and our portfolio now has a principal balance of $51.8 million at a weighted average interest rate of 7.1%. Our communities are reporting strong sales demand and we anticipate continued sales growth for the remainder of the year. Our sales operations' biggest concern is also the availability and pricing of our inventory. We have expansion sites coming online in markets that are experiencing strong sales demand. We anticipate completing the development of approximately 225 sites in 2021. In 2022, we plan on developing 400 to 600 additional lots. We continue to seek acquisitions that meet our growth criteria. We have offers out on several communities and we are working on building our pipeline. The acquisition market remains competitive. Prices have stabilized and value-add communities continue to increase, which has limited our recent acquisitions but increased the value of our existing portfolio. We have decided that now is the time to build or buy new communities from developers. We have entered into contracts to purchase three to-be-built communities in Florida. These communities will contain a total of 804 developed sites for a total purchase price of approximately $89.9 million. Construction of the first community is expected to be complete in the first quarter of 2022. This community will contain 219 sites and has a purchase price of approximately $23 million or $105,000 per site. The communities will be highly amenitized with clubhouses, pools, bocce ball, splash pools, dog parks, and more. We are working on additional development deals and anticipate growing our pipeline soon. To help fund these acquisitions and negate the short-term impact development deals have on FFO, we are negotiating a joint venture with an institutional investor. A joint venture will allow us to do a higher volume of development deals. We have built an irreplaceable platform that has delivered exceptional results time and time again. We have purchased and developed great communities. But even more importantly, we have created a great company with great people that can continue to achieve exceptional results for decades to come. And now Anna will provide you with greater detail on our results for the quarter.

Anna Chew, Vice President and CFO

Thank you, Sam. Funds from operations or FFO was $10.8 million or $0.22 per diluted share for the third quarter of 2021 compared to $4.5 million or $0.11 per diluted share for the prior year period. Normalize FFO, which excludes certain non-recurring items was $11.1 million or $0.23 per diluted share for the third quarter of 2021 compared to $7.4 million or $0.18 per diluted share for the prior year period; an increase of 28% on a per share basis. These increases were due to our strong operating performance and redemption of our series B preferred stock last year. Rental and related income for the quarter was $40.2 million compared to $36.4 million a year ago, representing an increase of 11%. Community NOI increased by 16% for the quarter from $20.1 million in 2020 to $23.4 million in 2021. These increases were primarily due to community acquisitions, the addition of rental homes, the growth in occupancy, and an increase in rental rates. Our same-property monthly site rent increased 3.9% and our monthly home rent increased 3.8%. Our average monthly site rent is now $474 and our average home rent is $811. Same property occupancy increased 190 basis points or 435 occupied sites over last year. Same-property occupancy is now 87.3% and same-property rental home occupancy is 95.6%. Sales of manufactured homes increased 15% for the quarter from $6.8 million in 2020 to $7.8 million in 2021. Our 15% increase in sales resulted in a sales gain of $611,000. Year-to-date, sales have improved 45% from $15 million last year to $21.8 million this year. Our sales gain for the year is at $1.5 billion as compared to $445,000 last year. During the quarter, we continued to strengthen our already strong financial position. We entered into a new ATM program for our common stock and sold approximately 1.1 million shares of common stock at a weighted average price of $23.70 per share, generating gross proceeds of $26.2 million and net proceeds of $25.8 million after offering expenses. These proceeds will be used for general corporate purposes, which include the purchase of manufactured homes for sale or lease to customers, acquisitions of additional properties, expansion of our existing communities, and paying down short-term debt on a temporary basis. During the quarter, we also obtained a $6.1 million mortgage on our Holly Acres Community. The interest rate on this mortgage is fixed at 3.21%. This mortgage matures on September 1, 2031, with principal repayments based on a 30-year amortization schedule. Proceeds from this mortgage were used to repay the existing $2.1 million mortgage, which had an interest rate of 6.5%. The refinancing of this community demonstrates the trapped equity within many of our encumbered properties. As we are able to refinance our communities, we will realize the value created by our business plan. As we turn to our capital structure at quarter end, we had approximately $507 million in debt, of which $467 million was community-level mortgage debt and $40 million was loans payable. 92% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 3.79% at quarter end compared to 3.81% in the prior year. The weighted average maturity on our mortgage debt was 5.3 years compared to 6.3 years last year. At quarter end, we had a total of $462 million in perpetual preferred equity. Our preferred stock, combined with the equity market capitalization of $1.1 billion and our $507 million in debt results in a total market capitalization of approximately $2.1 billion at quarter end, representing an increase of 43% over the prior period. From a credit standpoint, our net debt to total market capitalization was 20%. Our net debt-for-securities to total market capitalization was 16%. Our net debt to adjusted EBITDA was 4.8 times. Our net debt-for-securities to adjusted EBITDA was 3.7 times. Our interest coverage was 4.2 times and our fixed charge coverage was 1.7 times. From a liquidity standpoint, we ended the quarter with $82.4 million in cash and cash equivalents and $50 million available on our credit facility with an additional $50 million potentially available pursuant to an accordion feature. We also had $38.5 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory and $15 million available on our line of credit secured by rental homes and rental home leases. Additionally, we had $103 million in our REIT securities portfolio that is currently unencumbered. The portfolio represents approximately 6.8% of our un-depreciated assets. We live in our portfolio to no more than 15% of our un-depreciated assets. We are committed to not increasing our investments in the REIT securities portfolio. During the quarter, we sold $7.2 million of securities for a realized gain of $2.6 million. We plan on maintaining our securities portfolio at approximately $100 million. We are working towards refinancing our 6.75% series C preferred stock and our 6.375% series D preferred stock, which comes due in July of 2022 and January of 2023, respectively. We plan to utilize a combination of equity and debt to drive significant earnings growth, which Sam highlighted earlier. We have already begun positioning ourselves for this refinancing. We believe we can achieve savings of 200 to 300 basis points. The incremental FFO from this refinancing, as well as the continued organic growth in earnings, positions the company to prosper for years to come. And now let me turn it over to Jim before we open it up for questions.

Jim Lykins, Vice President of Capital Markets

UMH’s basic business of providing quality affordable housing has never been better. Our strategy of acquiring value-add communities below replacement costs with vacancies and rehabilitating them could not have come at a better time. Since 2010, we’ve purchased 99 communities containing 17,200 sites with a blended occupancy rate of 75%. These vacant sites that we acquired provide us with a one way for future occupancy and revenue growth. As we previously mentioned, turnaround acquisitions take two to three years to come online before they start to positively contribute to earnings. The capital improvements, good management, and investment in new housing stock have allowed us to drive best-in-class same-property occupancy and NOI performance. We still have 3,300 vacant sites within our existing portfolio to fill and 1,800 vacant acres that can potentially be developed into approximately 7,300 new home sites. These vacant sites and expansion sites may provide us with a runway to continue to produce similar same-property results moving forward. In addition to the anticipated improvement in earnings from operations, we are working on our strategy to redeem and replace our outstanding preferred series with lower-cost equity and debt. Reducing our cost of capital could drive earnings growth in the $0.20 to $0.30 per share range. The future is bright for UMH, but our nation faces an affordable housing crisis. We continue to focus on our social mission of providing the nation with quality affordable housing. Our elected representatives on both sides of the aisle recognize the problem developers face in providing this housing. We are working with local, state, and federal officials, as well as the manufacturing housing institute to help spread the message that manufactured housing is the best way to provide unsubsidized quality affordable housing. The current administration has been very supportive of building new manufactured housing communities, and we expect to see additional development opportunities as zoning barriers are addressed. We want developers and realtors to know they can earn significant profits finding us manufactured home community development projects throughout the country. We believe developers can contract land, engineer quality communities, obtain full approvals, and then sell it to us while earning approximately $10,000 per approved site, depending on the market. We believe getting this message out could make us the fastest-growing provider of communities containing a combination of resident-owned and resident-rented manufactured homes in the country. We also expect more favorable financing for our residents, giving them the ability to finance and refinance their homes. Down payment assistance programs currently being contemplated by the federal government will make manufactured housing a realistic housing alternative for the underserved portion of our population. We are committed to playing a crucial role in solving the affordable housing crisis. Those who seek investments with worthy social goals should consider our company. We would now be happy to take your questions.

Operator, Operator

Thank you. We will now begin the question and answer session. The first question comes from Rob Stevenson with Janney. Go ahead.

Rob Stevenson, Analyst

Good morning, guys. Sam, I know you want to be reasonable on renewals with tenants. But on new leases, how are you thinking about pricing? I mean, when you look at the apartment REITs, most of those guys are up double digits on new leases these days, even the ones that didn’t get hammered in 2020. How are you sort of factoring that in as you guys go through pricing on new leases?

Samuel Landy, President and CEO

Well, as you know, when we began this manufactured home industry and manufactured home communities had an image problem. By being very moderate on our rent increases, just 4% per year, we have dramatically improved the word-of-mouth pertaining to manufactured home communities, at least those managed and operated by UMH properties. So for existing residents, people who live in homes that they own or homes that they rent from us, we are targeting a 4% rent increase. I want to emphasize, however, there is a significant distinction between existing residents and new residents. For new residents who are purchasing a new home and renting a site from us for the first time, we can set the rent to whatever the market will bear, which may indeed be a 10% to 15% increase over existing rents. The same goes for rental homes. But for current residents, our goal is to keep rents as low as possible while aiming for a 50% expense ratio if residents pay water and sewer and a 30% ratio if it’s separately metered. Achieving these goals positions us well for high occupancy rates and operational efficiency.

Rob Stevenson, Analyst

Do you guys track same-store new lease growth on a quarterly basis? Do you have that number if you do?

Samuel Landy, President and CEO

We don’t have it in front of us, but it’s something that we are starting to look into now and we’ll come back to another time with the answer there.

Rob Stevenson, Analyst

And then Sam, can you talk about home sales demand versus the ability to get the homes? I mean, you guys did a good amount this quarter. But how much more homes could you have sold if you had access to more inventory? Is it substantial or are you selling about what you would even if the inventory wasn’t constrained?

Samuel Landy, President and CEO

My belief is it's substantial. Brett has the exact numbers. So go ahead.

Brett Taft, Vice President and COO

Yes, absolutely. Our home sales numbers, first of all, we’re very happy with that and they were up 15% on the quarter, and we’re up 45% on the year. Looking at our second quarter numbers, we had a lot of inventory in place set up and ready to be sold, which is what allowed us in the second quarter to drive what I believe was 91% sales growth. Speaking with all of our sales team and looking at the market and analyzing finance applications that are currently in place, we do have a lot of deals pending, and we expect to achieve similar sales growth. However, the same constraint applies to rental units which is that our same-property occupancy was up 190 basis points or 435 units year-over-year. We were accustomed to seeing increases in the 280 to 320 basis points range and 690 to 780 year-end. So we are aggressively ordering homes. We believe that we have substantial inventory slated to arrive in the fourth quarter and the first half of next year to allow us to hit our goals, but we are certainly inventory constrained.

Rob Stevenson, Analyst

If you order a home today, how long is it taking for you guys to get it on-site?

Brett Taft, Vice President and COO

It depends on the market and the manufacturer it’s coming from, but it’s anywhere from 6 to 12 months.

Rob Stevenson, Analyst

So you guys are almost at this point ordering for 2023?

Brett Taft, Vice President and COO

We are having those discussions as we speak. Yes.

Rob Stevenson, Analyst

And then the last one for me. Given your commentary on looking to replace the preferred, how far in advance are you willing to put in replacement financing there and sort of carry the sort of double hit for some period of time in terms of twice the financing? I mean, would you do it six months early and carry the additional financing for that six months if the rates on both equity and debt are advantageous? Or does it have to be more within three months? How do you think about that?

Anna Chew, Vice President and CFO

Right, six months is great, because we do not believe the dilution is very much. We have calculated, although I don’t have it in front of me right now, but we’ve already started that’s why we had our ATM open. We’ve raised quite a bit of money on our ATM, we have cash available, we have cleared a lot of our bank lines. We have availability on our rental home line, and our notes receivable life. If needed, we can also tap into our securities portfolio.

Operator, Operator

The next question comes from Keegan Carl with Berenberg. Please go ahead.

Keegan Carl, Analyst

Thanks for taking the questions. I know you touched on it a little bit earlier, but can you give some more color on the acquisition pipeline going forward? Just reiterating, it's been low volume this year. Is it truly a function of pricing or is there just not as much out there that you think fits your portfolio at the moment?

Samuel Landy, President and CEO

Brett’s going to be more specific, but we try to be very opportunistic with acquisitions. When you try to force them, they tend to become overpriced. Right now, there are significantly more buyers than sellers in the market, creating challenges, but that said, here’s Brett.

Brett Taft, Vice President and COO

Sam hit the nail on the head there. We’re definitely looking for existing acquisitions. We do have an offer out and are negotiating a contract but can’t elaborate further at the moment. Earlier in the year we provided acquisition guidance of $25 million to $50 million in both value-add and stabilized deals. We’re likely to come just short of that this year, but we’re pleased with the $18.3 million we were able to acquire. We are growing the portfolio in desired areas, and we’re seeing good performance there. Regarding pricing, as previously mentioned, with so many buyers entering the market, we’re observing cap rates compressing to levels where we scrutinize the cost per site and the potential returns on investment through improvements needed, management, and rental market conditions. We’re not dismissing value-add opportunities altogether; nevertheless, we’re finding new development opportunities appealing too.

Keegan Carl, Analyst

Just on that front, basically, how many new greenfield development opportunities are you guys seeing out there, typically weighted towards the southern states?

Samuel Landy, President and CEO

Yes, it’s a limited number, primarily in southern states. We’ve effectively conveyed that message through our prepared remarks and are collaborating with MHI and others to spread the word. Developers have largely avoided building manufactured home communities due to the scarcity in recent years. We’re incentivizing developers to step up by offering a $10,000 per lot profit for their efforts, conditioned upon obtaining approvals and engineering. As we communicate this message, we expect developers to respond positively, and we are ready as buyers. We remain optimistic about increasing new community construction across the country.

Keegan Carl, Analyst

Got it. And just one final one for me. Bigger picture, could you provide some more color on the White House’s proposed affordable housing plan and where you see yourself fitting in? Also, how do the additional opportunities from this proposal fit relative to previous administrations?

Eugene Landy, Chairman

We’re very excited about what’s being proposed through this housing plan, and we hope it gets adopted. One key proposal aims to provide down payment assistance for those who have been excluded from owning homes. Both parties acknowledge the historical disconnect between rising home prices and those unable to afford a down payment. They’re proposing assistance of $15,000 per person for first-time homebuyers, with another bill proposing $25,000. If passed, this could impact demand for manufactured housing significantly, addressing the housing crisis that we currently face. The argument for the urgent need for more homes remains. We need to build at least 100,000 homes yearly, which extends well beyond the current demand. We hope that this positive response to manufactured housing will continue to grow into the next two decades.

Keegan Carl, Analyst

Got it. Thanks for the time, guys.

Operator, Operator

The next question comes from Craig Kucera with B. Riley. Please go ahead.

Craig Kucera, Analyst

Yes, good morning. Sam, for years, you’ve put in 800 to 900 homes—rental homes into your communities and obviously having some challenges with inventory today. But given visibility into what you’re ordering well into next year, can you provide some color on what you expect to do in 2021 and maybe sort of what your expectations are for 2022?

Samuel Landy, President and CEO

For 2021, we aimed to add 900 rental homes and sell 200 new homes. We’re going to fall short of that goal due to the unavailability of housing. However, I don’t believe it will negatively affect our overall performance. The inventory that has been in preparation should ensure we meet our goals. As you can see, we’re at the end of the third quarter, and our numbers aren’t negatively impacted. Typically, winter marks the slowest season for manufacturers, so we hope they can catch up in the first and second quarters of 2022, allowing us to get back to our goal of adding 900 rental homes and 200 new home sales.

Brett Taft, Vice President and COO

Yes, just to add regarding the current inventory, we’ve got 208 homes on site in various stages of setup. Assuming they set up successfully during the fourth quarter and continue into the first quarter, we have 430 additional homes ordered prior to June this year. As I mentioned earlier, given the current timelines, those homes are expected to arrive throughout the first quarter, providing a solid pipeline to maintain reasonable same-store occupancy growth.

Craig Kucera, Analyst

Got it. I appreciate that. Switching gears, you mentioned that you were looking to buy three communities for about $90 million. One of those is going to be completed in the first quarter. Can you discuss the others? Are they expected to be constructed in 2022?

Samuel Landy, President and CEO

Yes, the other two communities are expected to be delivered in the fourth quarter of 2022. This is development, so there are many moving parts; I can’t guarantee them. But the current plan is to have them open at the beginning of the fourth quarter. If anything changes, we’ll keep you posted.

Craig Kucera, Analyst

Great. Given that these are brand new communities, are you thinking that you’re going to continue to have them renew at 4% increases, or is there a consideration to possibly push that a little harder because they are newer than your typical value communities?

Samuel Landy, President and CEO

Pricing for new communities is entirely distinct from existing properties. With all new infrastructure and amenities, these communities warrant a different pricing strategy. Every company must prioritize pricing, which is crucial for profitability. We intend to conduct extensive market studies to ensure our manufactured homes and communities remain the lowest cost producer of quality housing, but we won't set rates lower than the market will bear.

Brett Taft, Vice President and COO

You are right in line with what we're predicting regarding pricing. So yes.

Operator, Operator

The next question comes from Henry Coffey with Wedbush. Please go ahead.

Henry Coffey, Analyst

Yes. Good morning, and thank you for taking my question. I know you put it out there, but these three communities represent how many sites?

Samuel Landy, President and CEO

804 total sites. The first community is expected to be delivered in December/January, which should be in the first quarter of next year and will comprise 219 sites.

Henry Coffey, Analyst

And the sort of rent-up cycle and the joint venture—how do those work? Is it the joint venture going to hold the assets until the rental cycle is completed? Or how does that work?

Samuel Landy, President and CEO

I’ve got to be a little careful, as the joint venture agreement isn’t finalized yet, but we are working on it. The joint venture will fill the properties, and there will be a hold period at certain times throughout the cycle with triggers for either a buyout or a sale on the open market. Without going into too much detail, that’s the general strategy. The joint venture, with us as the managing partner, will be responsible for the project’s infill.

Brett Taft, Vice President and COO

I’d like to add a point here. Development requires significant capital that typically does not generate profit during the initial phases, which can span 3, 5, or even 7 years. By forming a joint venture, we can pool capital, minimize the amount we have tied up, and gain immediate management fees for operating it as assets under management. This approach turns a negative into a positive—immediately providing FFO where it would have otherwise been absent. The joint venture enhances value for both us and our partner, which is an exciting prospect moving forward.

Henry Coffey, Analyst

Now, just continuing on those themes, we’ve heard from some mortgage brokers and bankers who are beginning to offer manufactured housing finance programs to their brokers. How would the availability of that sort of financing, whether from agencies or GSE, change the landscape for your residents and your approach to financing acquisitions?

Samuel Landy, President and CEO

The demand for lower-cost housing enhances market demand. Improving financing options will boost occupancy, as it enables access for demographics previously sidelined. The government is addressing the issues of zoning and financing for manufactured homes, and we’ve been involved since 2001, providing lower financing rates than peers. Numerous laws enacted after 2009 restrict our lending capacity to those who would otherwise benefit from homeownership. Improvements in financing will be advantageous for the industry and our residents.

Henry Coffey, Analyst

Would that change your own approach as you’ve been financing your own residents until now? Would you move those assets to the agencies?

Samuel Landy, President and CEO

If the agencies provide significantly lower financing rates than our current loans, we would be open to options such as securitizing those loans or refinancing. Our focus remains on maintaining communities at 95% occupancy while managing expenses through lower financing costs.

Anna Chew, Vice President and CFO

We have approximately $100 million in mortgage debt maturing in 2022 and 2023, and we believe we will successfully refinance that to obtain over $200 million, which would unlock approximately $100 million in trapped equity.

Samuel Landy, President and CEO

What Anna mentioned strictly pertains to the property level. We also possess 8,700 rental homes purchased with cash, and we work diligently with GSEs and banks to facilitate direct lending on these properties. If successful, this could be significant. Imagine 8,700 homes valued at roughly $70,000 each—we could achieve considerable financing directly on these residences. While we haven't yet cleared that hurdle, we are steadily pursuing this goal.

Henry Coffey, Analyst

What are the primary resistance points?

Samuel Landy, President and CEO

Initially, there were difficulties tracking collateral when properties aren’t adequately organized. For example, if a community comprises 250 homes, how can a GSE confidently track which loans apply? That pushed us to focus on projects like an all-rental community in Memphis Blues. By achieving 95% occupancy there, we can finalize that deal, shaping a model for financing similar communities in the future.

Henry Coffey, Analyst

Thank you for answering my questions.

Operator, Operator

The next question comes from Brian Hollenden with Aegis Capital. Please go ahead.

Brian Hollenden, Analyst

Good morning and thanks for taking my call. On the residential development deals in Florida at $105,000 per pad, what returns on capital are you guys expecting?

Samuel Landy, President and CEO

We are expecting returns—including sales profits—in the range of 6% to 7%, essentially accounting for the sales profit deducted from the $105,000 cost per site. If you exclude the initial cost and consider stabilized yields, they are likely in the 4.5% to 5.5% range. Meanwhile, we’re also analyzing IRRs exceeding 7.5% unlevered over seven years.

Brett Taft, Vice President and COO

Keep in mind that historically, individual builders would construct a community and sell homes to fund lot purchases, collecting lot rent indefinitely thereafter. Due to various housing downturns, this practice waned. Today, securing a profitable margin on a $105,000 investment in Florida is feasible; thus enhancing margins provides us the flexibility to earn significant profits depending on market conditions.

Brian Hollenden, Analyst

That leads to my follow-up. How many homes within the new developments do you expect to be customer-owned versus lots that will become rentals?

Samuel Landy, President and CEO

It’s difficult to provide a definite answer since our goal is securing cash flow quickly. We aim to avoid having numerous vacant lots; our approach involves enabling quick activity. Accordingly, we will actively market both homes for sale and rent. However, the strategy will hinge on market conditions to decide how we approach filling those homes.

Brett Taft, Vice President and COO

The yield ranges I provided earlier were distinctions between sales and rentals.

Samuel Landy, President and CEO

We are happy to report that this year we developed 225 new sites. Sales are going smoothly, although the challenge remains that if we had more homes available, we could fill sites more rapidly. However, we are satisfied with the sales performance. For 2022, we aim to add between 400 and 600 lots. We believe that the more conservative 400 is quite attainable.

Brett Taft, Vice President and COO

We have a very capable team in place for approvals and site development. Our professionals—Craig Koster, our attorney, and Jeff Yorick, our engineer—are well-equipped to manage collaborations with outside developers and comply with engineering and permitting requirements.

Operator, Operator

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

Samuel Landy, President and CEO

Thank you, operator. I would like to thank the participants on this call for their continued support and interest in our company. As always, Eugene, Anna, Brett, and I are available for any follow-up questions. We look forward to reporting back to you in February with our fourth quarter and year-end 2021 results. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. The teleconference replay will be available in approximately one hour. To access this replay please dial U.S. toll free 1-877-344-7529 or international at 1-412-317-0088. The conference ID number is 101-599-17. Thank you and please disconnect your lines.