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Hello, ladies and gentlemen. Thank you for standing by. Welcome to the Flagship Communities REIT Second Quarter 2021 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded.Today's presenters are Kurt Keeney, Flagship's President and Chief Executive Officer; Nathan Smith, Chief Investment Officer; and Eddie Carlisle, Chief Financial Officer.Please note that comments made on today's call may contain forward-looking information. And this information, by nature, is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR. These documents are also available on Flagship's website at flagshipcommunities.com.Flagship has also prepared a corresponding PowerPoint presentation, which it encourages you to follow along with -- during this call. And I'll now pass the call over to Kurt Keeney. Please go ahead, sir.
Thank you, Sylvie. Good morning, everyone. Thank you for joining us today. Since becoming publicly traded at the end of last year, our goal was to demonstrate the strength of the MHC sector as well as our ability to operate and deliver value for unitholders.Our operating and financial results year-to-date prove that we've done that consistently. But during the second quarter, we demonstrated something far more significant, the ability to export our business model into new operating regions.In May, we completed the acquisition of an MHC in Little Rock, Arkansas, for approximately $5.3 million. The acquisition is 76.6% leased and is expected to be immediately accretive to the REIT's AFFO on a per unit basis. This acquisition provides us with an entry point into Arkansas while leveraging management synergies with our nearby existing communities in Southwestern Kentucky.We also completed the acquisition of 2 high-quality MHCs in the greater Indianapolis market and the greater St. Louis market, comprising of 677 lots for a purchase price of approximately $66.4 million. The St. Louis acquisition comprises of 502 lots across approximately 103 acres and is our first entry point into the state of Missouri. The community has a strong occupancy rate of 97% and includes 191 rental homes. Similar to our Little Rock acquisition, operating in Missouri will allow us to leverage the existing management synergies with our nearby portfolio.The Anderson acquisition strengthens our footprint in our existing core market of Indiana.The MHC comprises 175 lots across approximately 70 acres and is close to Anderson, state parks, historical attractions, the downtown Indianapolis core, the Indianapolis Motor Speedway and the Indianapolis Pacers and Colts. And in nearby Evansville, Indiana, we completed the 3 -- an acquisition of 3 acres of expansion land adjacent to our currently owned MHC community of Pinecrest Pointe. In addition to being situated in an area that we know well, this adjacent land presents us with marketing opportunities from road frontage and a 10,000 square foot self-storage providing with immediate cash flow.We funded these acquisitions through an equity financing of $81 million that we completed during the quarter. Using the proceeds of the financing towards these acquisitions allows us to maintain our strong balance sheet while enabling us to evaluate additional strategic acquisitions, both within and adjacent to our existing operating footprint. We're very proud of these new additions to the portfolio, and we've included some pictures in the accompanying presentation.Now let's turn to the financial results of the quarter. Our revenues, net operating income and adjusted funds from operations all remained strong and exceeded our forecast. This is mainly due to 3 factors: first, the acquisitions we have completed to date; second, higher-than-forecasted utility reimbursements and other revenue-sharing agreements; and finally, cost containment initiatives we realized during the quarter.As we continue to navigate the COVID-19 environment, we believe manufactured homes will continue to be a dwelling of choice amongst the general population. Simply put, manufactured homes offer a better living experience compared with other options. These homes are detached structures that do not share walls, utilities, air conditioning or heating with any other homes. Our customers typically enjoy 2-, 3- and 4-bedroom homes, typically with 2 bathrooms. These homes also have a deck, yard, driveway and in-home laundry facilities. Our MHCs also typically include recreational amenities and common areas, including clubhouses, green spaces, playgrounds, basketball courts, soccer fields, fishing lakes and after-school programming.And now I'll turn it over to Nathan to provide some detail on our new operating region. Nathan?
Thanks, Kurt. Good morning, everyone. As Kurt mentioned, last quarter was especially noteworthy because it was the first time stepping out of our existing footprint. These acquisitions were made possible in part through our long-standing industry relations.We have been in the MHC space for 26 years, and during this time, we have established ourselves as credible operators and have gained many relationships in the industry, both which is necessary for our growth. The MHC industry has high barriers to entry. The top 50 MHC investors are estimated to control around 17% of the estimated 4.2 million manufactured housing lots available for rent in the United States. We are growing quickly, both within our existing markets and abroad, but we are not growing for growth's sake.All of the acquisitions we have made to date adhere to our strict disciplined criteria as follows. First, we're looking for opportunities that will be accretive to our adjusted funds from operation per unit. Second, we are seeking opportunities that will enable us to leverage management synergies and generate economies of scale. And finally, we're seeking acquisition targets within adjacent U.S. states where we currently operate or new states with similar regulatory frameworks and characteristics as the existing markets within our portfolio.Following this framework allows us to achieve measured growth while establishing a platform to acquire adjacent properties or enter new jurisdictions. And that is why we are very pleased to welcome Arkansas and Missouri to the Flagship portfolio family. These acquisitions are expected to be immediately accretive to the AFFO per unit and allow us to leverage management synergies from nearby operations and generate economies of scale.They are also in jurisdictions that have similar demographic characteristics as our existing markets. The suburban Little Rock acquisition provides access to top-rated schools in Pulaski County Special School District and features walkable neighborhoods with easy access to highways, parks, playground, sports courts, a swimming pool and a community center. Adjacent to Lake Pickthorne, the community is located within 5 minutes of Holland Bottoms State Wildlife Preserve, which provides camping, hunting and fishing opportunities.As the capital and most popular city of Arkansas, Little Rock is the cultural, economic, government and transportation center. Little Rock sits on the banks of the Arkansas River at the crossroads of Interstate 30 and Interstate 40.Similar to Arkansas, our acquisition in St. Louis, Missouri is also a cultural and economic and transportation center. It is close to proximity to St. Louis Lambert International Airport, 3 post-secondary institutions, 2 shopping centers and 2 hospitals. The community includes a clubhouse, basketball court, swimming pool, game room, playground and a community center. It is adjacent to Interstate I-64, provides excellent access to major transportation routes and is near accessible based shopping, including the Walmart Supercenter and a Lowe's Home Improvement Center.I'll now turn it over to Eddie, our CFO, to talk about our financial performance for the quarter. Eddie?
Thanks, Nathan. Good morning, everyone. We generated revenue of $9.8 million during the second quarter, which was higher than the forecast, primarily due to the acquisitions completed since our IPO.Net operating income and NOI margin was $6.4 million and 65.4%, respectively, both of which were slightly higher than the forecast, due in part to our cost containment initiatives. Adjusted funds from operations and AFFO per unit was $2.8 million and approximately $0.21 per unit, respectively, which both exceeded the forecast by 19.5% and 15.4% during the second quarter.Same community occupancy of 80.6% increased by 1.4% as of June 30 versus the December 31, 2020. We believe this increase speaks to the merits of MHCs, specifically the affordability of MHCs and in part by the ongoing COVID-19 pandemic.Rent collections for the second quarter were 98.8%, which is a slight decrease quarter-over-quarter, but consistent with prior periods, demonstrating the strength and predictability of the MHC sector.As of June 30, our total occupancy was 80.7%, and our average monthly lot rent was $359. Both of these metrics were within our expectations. We ended the quarter with total cash and cash equivalents of $79.3 million. And yesterday, we signed a commitment for 2 loans in the amount of $30 million with 3.08% fixed rate for 20 years. These loans have an interest-only period for the first 84 months and will be amortized over 30 years. The loans will be used to help the REIT finance future acquisitions and for general business purposes.With that, I'll now turn it back over to Kurt for some final remarks. Kurt?
Thanks, Eddie. Our performance and our ability to add new jurisdictions and bolster our presence in existing markets speaks to the strong fundamentals of the MHC sector. This sector has shown a consistent track record of growth over the past 20 years.We are the one of the Midwest region's largest MHC operators, and we're the only pure-play manufactured housing investment in the Canadian capital market. Our REIT offers investors an opportunity to participate in a niche and stable market with a significant growth potential. And following our successful equity financing, we continue to have a strong balance sheet with no near-term debt obligations as we embark on our next leg of growth.We certainly thank you for your time today, and I will now open up the line for questions.
[Operator Instructions] And your first question will be from Mark Rothschild at Canaccord.
You spoke in the past, I think it was last quarter, about stimulus checks, helping people with down-payments. Obviously, housing has become even more expensive and hot across many markets. How is the market for selling homes and leasing up vacant lots? And is it possible we could see a more meaningful jump in occupancy over the next year?
Well, I think what we're seeing right now is that there's certainly still continued governmental assistance out there, although it's not through stimulus checks anymore. Our activity on sales year-to-date is we're very pleased with. We have not seen a substantial downturn since the stimulus checks stopped flowing. Bear in mind that we still have child tax credit checks that are still flowing somewhere between $250 and $300 per child per household. So for our customers, they normally have 2 to 4 children per household when they have it.So I think the interesting thing about it is housing affordability, Mark, has got so much pressure on it right now. The alternatives for both renting in our markets -- again, we're not in urban centers. We're in suburban areas in the Midwest. Our competitors really aren't the mobile home parks down the street or the manufactured housing communities down the street. They're really apartments and entry-level stick-built housing. And in both cases, what you're seeing is rent increases in apartments and you're seeing stick-built housing costs jump 30% or more.So when you -- and the credit underwriting for the stick-built alternatives is now equal to the time frame right behind The Great Recession. So not only are the houses more expensive, they're hard to get people's loans approved for stick-built housing alternatives. So what that means is more people are being pushed to us. So even though the stimulus checks kind of stopped flowing out from a true stimulus perspective, at the end of the day, I think more people are being pushed to us, and that's why we're continuing to see strong sales activity.I think we're still comfortable with our guidance on occupancy that we've given in the past, which is a 2% to 3% occupancy guidance annual year-over-year. And the rent increase guidance, we're still very comfortable with, which is 4% to 5% annually.
Next question will be from Scott Fromson at CIBC.
Just a quick question. I mean I think there's -- it's pretty clear what's happened and what's happened is good. Just wondering if you can comment on the NOI margin variance between the acquired and existing properties? What's the process or strategy to bring those margins up?
Eddie, you want to jump in?
Yes, absolutely. So this, honestly, is kind of the expectation for us when we are going in and doing these value-add acquisitions, right? So in the first kind of 6 to 9 months of these acquisitions, the value-add. So the Arkansas, the ones we did -- a few of the ones we did in Northern Kentucky here, you're going to see a higher operating cost kind of for that first 6 to 9 months where we go in and do our work, right?We're going in, we're cleaning up the communities, taking homes that are older homes that don't meet our standards, taking those out of the community and replacing those to enhance the curb appeal. So there's a lot of work that happens kind of in that first 6 to 9 months where we are going to see higher kind of labor costs, higher repairs and maintenance costs as well.What I think you'll see for those communities, the value-add after we get past that kind of first 6 to 9 months, it -- level out and starting to look a lot more like our normal operating margins in that 65% range. As well as some of these communities that we bought more recently, the ones we closed on in July, those aren't value-added communities. Those are best-in-class, really high-quality assets that you should see the operating margin to be similar to what we have today.There'll still be some variances as we continue to sell off the rental homes. We've always kind of cautioned and let people know, when you see higher rental home volume, you're going to see lower NOI margins. And that's one of our real business strategy to continue to work those number of rental homes down. And we'll continue to do that in the newly acquired communities.But the value add is what's really driving what you're seeing in those margins. And like I said, after the first 6 to 9 months of holding those, I would expect those margins to start creeping back up to our normal kind of normal rates.
That's very helpful. Just a quick question on the acquisition program. Do you expect opportunities to be more in the value-added space? Or are you seeing more in the, as you call it, best-in-class space? Or is it a mix of both and kind of you don't know what you got until you got it in the bag?
Well...
Nathan, do you want to jump in?
Yes. Here's what I would say. We are doing both, but you can only do so many value-add here because that's hard lifting. And we could have done most of that our 26 years in business. This being a REIT now gives us the opportunity when families are exiting that we are being able to buy best-in-class. And that's what we're basically doing. And when you look like -- we probably -- there's properties out there that we probably wouldn't have been able to touch. When you were -- if you had private equity or just our equity and that you're starting to see us take in some really high-quality stuff.And I think when we're able to visit with you folks here in the United States, hope to be sooner than later, you'll see that this is some serious high-quality stuff that we're purchasing right now, things that trade once in a lifetime. And it's definitely -- I will say this, President Biden is definitely my best friend right now because the more they talk about raising capital gains is the more you have families who are having to make a difficult decision, because either they [Technical Difficulty] sell in the next 6 months. So it's kind of where we're at. Does that help you?
Nathan, can you restate that? You actually broke up a little bit with your connection. Can you restate the last sentence?I think what -- again, we may have lost him briefly. Other than President -- okay. So we heard you say President Biden is your best friend.
I'm sorry, he is one of our best friends right now because the more he talks about capital gains going up is the better off we are. And I expect the next 6 months to be extremely busy because families are going to have to make a decision very quickly, do they stay for 6 years or do they go ahead and get out.
So with that in mind, and I don't want to hog the line here, do you see private equity coming and [ meddling ] up these sort of accelerated sale of assets? Or are they looking for bigger packages because they -- there's obviously been a lot of capital raising and they may have needs to deploy greater amounts of capital in particular deals?
We run into them every day. And honestly, I don't even know what they're thinking sometimes. I have to be honest with you. We've been in private equity before. And Kurt and I, as we said, with private equity, we couldn't buy these properties. Private equity -- I mean -- but again, I don't know what they're thinking right now. All they can do right now is buy a property and raise rent $100. And you know what, we're not going to do that.
Well, it's interesting, to Nathan's point, we ran into private equity for the last decade. And right now, with our current cost of capital being so attractive, I think we can compete with private equity on anything that we'd like to purchase any day. Certainly, with our B operating units, we can compete aggressively as well. Our cost of capital is in the 3s. Most of the private equity we've seen has the cost of capital that starts with the 10.So again, I think we're -- it's a fair fight, and we get up every day and go to work. And Nathan's 26 years of networking is bringing literally some of the assets that you've seen Nathan's been talking to for 20-plus years. So it's not like private equity showed up yesterday and said, Oh, they don't know them. So we're very proud of the relationships, and we look forward to the competition. It's a pretty exciting time [ to tell you the truth ].
Next question will be from Kyle Stanley at Desjardins.
So just sticking on the acquisition theme just for a minute and the discussion on private equity. I mean historically, I feel like you guys have mentioned in the past that maybe private equity wasn't quite as active in your markets and focusing a little bit more on the West Coast. I'm just wondering, are you seeing that change a little bit more. I know you have some definite advantages when competing against private equity for assets. But are you just seeing them in the mix a little bit more now than maybe in the past?
They're here. I mean there's no doubt, they're here. I don't know. It may be incrementally a little bit more, but they -- is what I would say. I mean, Nathan, you're welcome to jump in. But they're here, they're competing. And again, I think long term, our corporate structure, our capital structure, our philosophy and our -- we consider a permanent capital structure with the REIT. It's just a better opportunity for the sellers of communities to know that somebody is going to take care of their properties and treat their folks right later. But do we see private equity more? Yes, we do.
Families [ don't trust ] the private equity because they've seen some of the things that they've been doing. And remember, these people have lived off these people for years, and they do not find that to be very nice, what they do.
Okay. That makes sense. And then I just wonder, for the balance of the year, do you have any thoughts on the potential acquisition volume, just given the pipeline you're seeing right now?
I'm working diligently to buy great properties.
I don't know if you're allowed to fully answer that, Kyle. But I probably wouldn't -- I can't answer the fact that I'm very excited that Eddie secured some permanent capital for 20 years at 3.8% -- 3.08%. And the reason for that is because we think we're going to be needing to deploy more capital. And we've got access to do what we need to do.
Okay. Point taken there, for sure. And then just taking a look at the utility recapture, which was close to 100% this quarter. Can you just talk about how you've been able to achieve that level of utility reimbursement? And then you're still expecting, on average, closer to 80% recapture? Or would you be comfortable increasing that target?
Yes. Maybe I'll talk a little bit and then...
Eddie, jump in.
Yes. So what I'll say is we have a laser focus on utilities. We have a person and an operating team that is -- their jobs are to work on utility recapture, finding leaks. About -- I guess about 9 months ago now, about the time we did the IPO, we've all kind of held hands and agreed and focused on one system that we use now. That's a real-time leak protection system that's really paid dividends for our utility reimbursements.The utilities manager now gets real-time leak detection. He is on the phone with the partner managers of the operation guys to find the leaks to help resolve those. And that's proven to really be a valuable system to us.With that said, when you're looking at long term, yes, 100%, it's great for this quarter. What that means is either: a, the leak did happen this quarter; or b, it was a leak that was easy enough to find that we found it. There's still certainly the -- it can take one big leak, one pipe burst somewhere to kind of knock that back down.I think I'm comfortable now to move from 80% to 85%, but I'm certainly not comfortable to say, hey, we're always going to be running 95-plus percent. Nevada does this 90% plus, and we've been able to achieve that for a quarter or 2, and hats off to our utilities manager and his team for making that happen and just the managers at the parks. Because they play a big part in this, right?I mean if you have water running down the street in the days -- here, it hasn't rained in 2 weeks, it feels like. And people just ignore it, well, then you don't have the utility recapture. So a huge credit to our park managers and district managers who are actively seeking those out and doing the work. But I think moving it up incrementally, I'm comfortable with, and that's what we'll look at as we start looking at next year. But anything beyond that, I don't think I would be comfortable at this point.
Okay. Great. And just one last quick one from me. Is adding self-storage to existing communities something the REIT will look to do forward, I mean, similar to what was the 10,000 square feet on the expansion lines that you acquired?
Probably not is the short answer. We're a manufactured housing company. That acquisition was about just 3 acres, but what it really did was it gave us essentially a place to showcase homes for sale that was on an interstate. And we think that land is better suited. We will go back and try to change some entitlements to actually expand the park, but we don't have that done yet. So that was strictly a good old-fashioned, local marketing, good real estate decision to buy that. The 10,000 square feet of self-storage was frankly -- it was okay that it was there. I would have bought it without it being there.It's a different business. Self-storage is a different business. And we've owned it and -- in the past. And we are very good, if I could be a little bit arrogant for a second. I feel like we're very capable and we love manufactured housing. And when you see self-storage in our numbers, it's going to be very minor, and it's going to just be kind of an amenity that we got there. We won't dispose of it, but you won't see us doing large-scale self-storage.
Your next question will be from Himanshu Gupta at Scotiabank.
So just one question from my side. With respect to guidance, I think, Kurt, you mentioned occupancy growth of 2 to 3 points annually on a year-over-year basis and I think rent growth of 4% to 5%. Was that for 2021? Or do you think the same for 2022 as well?
I think the same. I've always been a little mindful that as the numbers get bigger, the percentage increases may go towards the lower end of the spectrum in our world. But I -- that's our comfort level right now in general. We're thrilled with -- customers are being pushed to us. And they're good customers, they have legitimate down payments to buy homes. And that's all being pushed to us right now in the marketplace. Housing affordability has got -- again, I said it earlier, but it's worth repeating, there's extreme pressure on housing affordability right now in our markets.And that's pushing people to it. So at the end of the day, will we grow our occupancy? Yes. Will it be more than 3%? Probably not, because it's a home ownership model. We could push that with home rentals. But the better occupancy long term is homeownership, which is what we're looking for. So I think all the guidance is probably the same guidance for the next year as well.
[Operator Instructions] And your next question will be from Joanne Chen at BMO.
Congrats on the great quarter. And just a really quick one from me. Most of my questions have been answered. But just on -- given the wall, you said, of capital, I guess, you're seeing kind of MHC assets from private equity. We did notice a little bit of a cap rate compression this quarter. But is that something that you guys expect for the remainder of the year?
Well, I think what you're seeing, when you're buying best in class, you probably are buying a little bit better -- the cap rate is a little bit lower is what I would say that you would see.
Okay. But I guess, given the...
Yes, I mean...
It seems like it's getting pretty competitive, right?
Again, we're not -- go ahead, Nathan.
I mean you're seeing families right now that I know, they'll come in and say, Nathan, I'm getting 10 calls a day. The thing about that's going in our way is that they know us and they trust us.
I agree. And we've got a very good history of closing on our transaction as promised. We don't retrade people. And I think that's something that you earn a reputation for over the years. And -- but to Nathan's point earlier, are you seeing best-in-class asset cap rates suppressed, I think the short answer is yes. Is it from competition? Short answer is yes. And we're still comfortable that it's accretive where we're at.We're not going to do things that aren't accretive. We're just not. And we are seeing better cap rates with the value-add, and we will continue to do this. But as mentioned earlier on the call, value-add is -- there's heavy lifting that goes along with that. You're going to be mindful of how much you try to accomplish at one time. And we're very comfortable doing it right now, but it is -- we're taking every opportunity we can in both value-add and best-in-class.
And at this time, we have no further questions. I will turn the call back over to Mr. Keeney. Please go ahead.
Well, thank you, operator, and thanks everybody for participating today. And feel free to reach out to our Investor Relations team at ir@flagshipcommunities.com if you have any further questions. We'd be glad to talk to you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.