NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2020 (UNAUDITED)
NOTE
1 – ORGANIZATION AND ACCOUNTING POLICIES
UMH
Properties, Inc., a Maryland corporation, together with its subsidiaries (“we”, “our”, “us”
or “the Company”) operates as a real estate investment trust (“REIT”) deriving its income primarily from
real estate rental operations. The Company owns and operates 122 manufactured home communities containing approximately 23,100
developed homesites as of June 30, 2020. These communities are located in New Jersey, New York, Ohio, Pennsylvania, Tennessee,
Indiana, Michigan and Maryland. The Company, through its wholly-owned taxable subsidiary, UMH Sales and Finance, Inc. (“S&F”),
also sells manufactured homes to residents and prospective residents in its communities. Inherent in the operations of manufactured
home communities are site vacancies. S&F was established to fill these vacancies and enhance the value of the communities.
The Company also owns a portfolio of REIT securities which the Company generally limits to no more than approximately 15% of its
undepreciated assets. The consolidated financial statements of the Company include S&F and all of its other wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated in consolidation.
On
March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic,
and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The Company’s 122
residential communities
remain open and operational. The effects of the COVID-19 pandemic did not significantly impact the Company’s operating results
for the first six months of 2020. However, the future effects of the evolving impact of the COVID-19 pandemic are uncertain.
The
Company has elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code (the “Code”) and intends
to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed
under federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders.
For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. The Company is subject to franchise taxes
in some of the states in which the Company owns property.
The
interim Consolidated Financial Statements furnished herein have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) applicable to interim financial information, the instructions
to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended
June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further
information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s annual report
on Form 10-K for the year ended December 31, 2019.
Use
of Estimates
In
preparing the consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, as well as contingent assets and liabilities as of the dates of the
consolidated balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ significantly from these estimates and assumptions.
Reclassifications
Certain
amounts in the financial statements for the prior periods have been reclassified to conform to the statement presentation for
the current periods.
Derivative
Instruments and Hedging Activities
In
the normal course of business, the Company is exposed to financial market risks, including interest rate risk on its variable
rate debt. The Company attempts to limit these risks by following established risk management policies, procedures and strategies,
including the use of derivative financial instruments. The Company’s primary strategy in entering into derivative contracts
is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs
derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter
into derivative instruments for speculative purposes. The Company previously entered into various interest rate swap agreements
that have had the effect of fixing interest rates relative to specific mortgage loans. As of December 31, 2019 and June
30, 2020, these agreements had expired and the Company does not have any interest rate swap agreements in effect.
Leases
We
account for our leases under ASC 842, “Leases.” Our primary source of revenue is generated from lease agreements for
our sites and homes, where we are the lessor. These leases are generally for one-year or month-to-month terms and renewable by
mutual agreement from us and the resident, or in some cases, as provided by jurisdictional statute.
We
are the lessee in other arrangements, primarily for our corporate office and a ground lease at one community. As of June 30, 2020,
the right-of-use assets and corresponding lease liabilities of $3.8 million is included in Prepaid Expenses and Other Assets and
Accrued Liabilities and Deposits on the Consolidated Balance Sheets.
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS
Future
minimum lease payments under these leases over the remaining lease terms are as follows (in thousands):
|
|
|
|
Jun. 30, 2020
|
|
2020
|
|
|
$
|
213
|
|
2021
|
|
|
|
427
|
|
2022
|
|
|
|
417
|
|
2023
|
|
|
|
384
|
|
2024
|
|
|
|
384
|
|
Thereafter
|
|
|
|
8,432
|
|
|
|
|
|
|
|
Total Lease Payments
|
|
|
$
|
10,257
|
|
The
weighted average remaining lease term for these leases is 144.4 years. The right of use assets and lease liabilities was calculated
using an interest rate of 5%.
Restricted
Cash
The
Company’s restricted cash consists of amounts primarily held in deposit for tax, insurance and repair escrows held by lenders
in accordance with certain debt agreements. Restricted cash is included in Prepaid Expenses and Other Assets on the Consolidated
Balance Sheets.
The
following table reconciles beginning of period and end of period balances of cash, cash equivalents and restricted cash for the
periods shown (in thousands):
SCHEDULE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
6/30/20
|
|
|
12/31/19
|
|
|
6/30/19
|
|
|
12/31/18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
10,970
|
|
|
$
|
12,902
|
|
|
$
|
3,725
|
|
|
$
|
7,433
|
|
Restricted Cash
|
|
|
6,267
|
|
|
|
6,094
|
|
|
|
5,571
|
|
|
|
5,344
|
|
Cash,
Cash Equivalents And Restricted Cash
|
|
$
|
17,237
|
|
|
$
|
18,996
|
|
|
$
|
9,296
|
|
|
$
|
12,777
|
|
Revenue
On
January 1, 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (ASC 606). For
transactions in the scope of ASC 606, we recognize revenue when control of goods or services transfers to the customer, in the
amount that we expect to receive for the transfer of goods or provision of services.
Rental
and related income is generated from lease agreements for our sites and homes. The lease component of these agreements is accounted
for under ASC 840 “Leases.” The non-lease components of our lease agreements consist primarily of utility reimbursements,
which are accounted for with the site lease as a single lease under ASC 840.
Revenue
from sales of manufactured homes is recognized in accordance with the core principle of ASC 606, at the time of closing when control
of the home transfers to the customer. After closing of the sale transaction, we generally have no remaining performance
obligation.
Interest
income is primarily from notes receivables for the previous sales of manufactured homes. Interest income on these receivables
is accrued based on the unpaid principal balances of the underlying loans on a level yield basis over the life of the loans.
Dividend
income and gain on sales of marketable securities are from our investments in marketable securities and are presented separately
but are not in the scope of ASC 606.
Other
income primarily consists of brokerage commissions for arranging for the sale of a home by a third party and other miscellaneous
income. This income is recognized when the transactions are completed and our performance obligations have been fulfilled.
Recently
Adopted Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” ASU 2016-13 requires that entities use a new forward looking “expected loss”
model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit
losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability
of the reported amount. ASU No. 2016-13 is effective for annual reporting periods, including interim reporting periods within
those periods, beginning after December 15, 2019. As of January 1, 2020, we adopted the fair value option for our notes receivable
and there was not a material impact. As of June 30, 2020 and 2019, the Company had notes receivable of $38.3 million and $33.1
million, net the fair value adjustment of $0.8 million and $0.7 million, respectively. Notes receivable are presented as a component
of Notes and Other Receivables, net on our Consolidated Balance Sheets. These receivables represent balances owed to us for previously
completed performance obligations for sales of manufactured homes.
In
August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair
Value Measurement” which removes, modifies, and adds certain disclosure requirements related to fair value measurements
in ASC 820. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, including interim
periods within that year. The Company adopted this standard effective with its financial statements for the quarter ended
March 31, 2020, and it did not have a material impact on its fair value disclosures.
Other
Recent Accounting Pronouncements
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying Consolidated Financial Statements.
NOTE
2 – NET INCOME (LOSS) PER SHARE
Basic
Net Income (Loss) per Share is calculated by dividing Net Income (Loss) by the weighted average shares outstanding for the period.
Diluted Net Income per Share is calculated by dividing Net Income by the weighted average number of common shares outstanding,
and when dilutive, the potential net shares that would be issued upon exercise of stock options pursuant to the treasury stock
method. In periods with a net loss, the diluted loss per share equals the basic loss per share as all common stock equivalents
are excluded from the per share calculation because they are anti-dilutive.
For
the six months ended June 30, 2020, common stock equivalents resulting from employee stock options to purchase 3.3 million shares
of common stock were excluded from the computation of Diluted Net Income (Loss) per Share as their effect would be anti-dilutive.
For the three months ended June 30, 2020, common stock equivalents resulting from employee stock options to purchase 3.3 million
shares of common stock amounted to 316,000 shares, which were included in the computation of Diluted Net Income (Loss) per Share.
For the three months ended June 30, 2019, common stock equivalents resulting from employee stock options to purchase 2.9 million
shares of common stock were excluded from the computation of Diluted Net Income (Loss) per Share as their effect would be anti-dilutive.
For the six months ended June 30, 2019, common stock equivalents resulting from employee stock options to purchase 2.9 million
shares of common stock amounted to 245,000 shares, which were included in the computation of Diluted Net Income (Loss) per Share.
NOTE
3 – MARKETABLE SECURITIES
The
Company’s marketable securities consists primarily of marketable common and preferred stock of other REITs with a fair value
of $91.7 million as of June 30, 2020, which represents 7.2% of undepreciated assets. The Company generally limits its investment
in marketable securities to no more than approximately 15% of its undepreciated assets. The REIT securities portfolio provides
the Company with additional liquidity and additional income and serves as a proxy for real estate when more favorable risk adjusted
returns are not available.
During
the six months ended June 30, 2020, the Company made purchases of $,000 in marketable securities. Of this amount, the Company
made total purchases of 54,000 common shares of Monmouth Real Estate Investment Corporation (“MREIC”), a related REIT,
through MREIC’s Dividend Reinvestment and Stock Purchase Plan for a total cost of $637,000 or weighted average cost of $11.72
per share. The Company owned a total of 2.6 million MREIC common shares as of June 30, 2020 at a total cost of $24.6 million and
a fair value of $38.1 million.
As
of June 30, 2020, the Company had total net unrealized losses of $50.4 million in its REIT securities portfolio. For the three
and six months ended June 30, 2020, the Company recorded a $13.4 million increase and a $25.2 million decrease, respectively,
in the fair value of these marketable securities. The Company held eighteen securities that had unrealized losses as of June 30,
2020. The Company normally holds REIT securities long-term and has the ability and intent to hold these securities to recovery.
NOTE
4 – LOANS AND MORTGAGES PAYABLE
Unsecured
Line of Credit
On
November 29, 2018, the Company entered into a First Amendment to Amended and Restated Credit Agreement (the “Amendment”)
to expand and extend its existing unsecured revolving credit facility (the “Facility”). The Facility is syndicated
with two banks led by BMO Capital Markets Corp. (“BMO”), as sole lead arranger and sole book runner, with Bank of
Montreal as administrative agent, and includes JPMorgan Chase Bank, N.A. (“J.P. Morgan”) as the sole syndication agent.
The Amendment provided for an increase from $50 million in available borrowings to $75 million in available borrowings with a
$50 million accordion feature, bringing the total potential availability up to $125 million, subject to certain conditions including
obtaining commitments from additional lenders. The Amendment also extended the maturity date of the Facility from March 27, 2020
to November 29, 2022, with a one-year extension available at the Company’s option, subject to certain conditions including
payment of an extension fee. Availability under the Facility is limited to 60% of the value of the unencumbered communities which
the Company has placed in the Facility’s unencumbered asset pool (“Borrowing Base”). The Amendment increased
the value of the Borrowing Base communities by reducing the capitalization rate applied to the Net Operating Income (“NOI”)
generated by the communities in the Borrowing Base from 7.5% to 7.0%. As of June 30, 2020, the amount outstanding under the Facility
was $15 million and the interest rate was 1.68%.
Loans
Payable
Loans
Payable includes unamortized debt issuance costs of $261,000 and $358,000 at June 30, 2020 and December 31, 2019, respectively.
The weighted average interest rate was 2.0% and
3.7% at June 30, 2020 and December 31, 2019, respectively, not including the effect of unamortized debt issuance costs. At June
30, 2020, $32.8 million was outstanding on the margin loan at an interest rate of 0.75%.
On
June 30, 2020, the Company entered into an amended and restated revolving line of credit for the financing of homes, increasing
total availability from $15
million to $20
million. Interest was reduced from prime
plus 25 basis points to prime with a floor of 3.25%.
The amendment also extended the maturity date from June 1, 2020 to June
1, 2022, with a one
year extension at the Bank’s option.
As of June 30, 2020, $5 million was outstanding on the revolving line of credit at an interest rate of 3.25%.
Mortgages
Payable
The
following is a summary of our mortgages payable as of June 30, 2020 and December 31, 2019 (in thousands):
SUMMARY OF MORTGAGES PAYABLE
|
|
6/30/2020
|
|
|
12/31/2019
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate mortgages
|
|
$
|
372,788
|
|
|
|
4.14
|
%
|
|
$
|
377,045
|
|
|
|
4.14
|
%
|
Unamortized debt issuance costs
|
|
|
(3,073
|
)
|
|
|
|
|
|
|
(3,387
|
)
|
|
|
|
|
Mortgages, net of unamortized debt issuance costs
|
|
$
|
369,715
|
|
|
|
4.17
|
%
|
|
$
|
373,658
|
|
|
|
4.18
|
%
|
As
of June 30, 2020 and December 31, 2019, the weighted average loan maturity of mortgages payable was 5.5 years and 6.0 years, respectively.
NOTE
5 - SHAREHOLDERS’ EQUITY
Common
Stock
On
June 15, 2020, the Company paid total cash dividends of $7.4 million or $0.18 per share to common shareholders of record as of
the close of business on May 15, 2020, of which
$771,000 was reinvested in the Dividend Reinvestment and Stock Purchase Plan (“DRIP”). Total
dividends paid to our common shareholders for the six months ended June 30, 2020 amounted to $14.8 million of which $1.7 million
was reinvested. On July 1, 2020, the Company declared a dividend of $0.18 per share to be paid September 15, 2020 to common shareholders
of record as of the close of business on August 17, 2020.
During
the six months ended June 30, 2020, the Company received, including dividends reinvested
of $1.7 million, a total of $3.3 million from its DRIP. There were 290,000 new shares issued under the DRIP during this period.
On
January 15, 2020, the Board of Directors reaffirmed our Common Stock Repurchase Program (the “Repurchase Program”)
that authorizes us to repurchase up to $25
million in the
aggregate of the Company’s common stock. Purchases under the Repurchase Program may be made using a variety of methods,
which may include open market purchases, privately negotiated transactions or block trades, or by any combination of such methods,
in accordance with applicable insider trading and other securities laws and regulations. The size, scope and timing of any purchases
will be based on business, market and other conditions and factors, including price, regulatory and contractual requirements or
consents, and capital availability. The Repurchase Program does not require the Company to acquire any particular amount of common
stock and may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. During
the first six months of 2020, the Company repurchased approximately 174,000
shares of common
stock at an aggregate cost of $1.8
million, or a
weighted average price of $10.50
per share. The
last repurchase was made on May 14, 2020.
8.0%
Series B Cumulative Redeemable Preferred Stock
On
June 15, 2020, the Company paid $1.9 million
in dividends or $0.50 per share for the period from March 1, 2020 through May 31, 2020 to holders of record as of the close of
business on May 15, 2020 of our 8.0% Series B Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share (“Series
B Preferred Stock”). Dividends on our Series B Preferred Stock shares are cumulative and payable quarterly at an annual
rate of $2.00 per share. Total dividends paid to our Series B Preferred Stock shareholders
for the six months ended June 30, 2020 amounted to $3.8 million.
On
July 1, 2020, the Company declared a dividend
of $0.50 per share for the period from June 1, 2020 through August 31, 2020 to be paid on September
15, 2020 to Series B Preferred Stock shareholders of record as of the close of business on August 17, 2020.
On
March 13, 2020, the Board of Directors approved our Series B Preferred Stock Repurchase Program (the “Series B Repurchase
Program”) that authorizes us to repurchase up to $5 million in the aggregate of the Company’s Series B Preferred Stock.
Purchases under the Series B Repurchase Program may be made using a variety of methods, which may include open market purchases,
privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider
trading and other securities laws and regulations. The size, scope and timing of any purchases will be based on business, market
and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability.
The Series B Repurchase Program does not require the Company to acquire any particular amount of Series B Preferred Stock and
may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. During March 2020,
the Company repurchased 531 shares of our Series B Preferred Stock for approximately $12,000.
6.75%
Series C Cumulative Redeemable Preferred Stock
On
June 15, 2020, the Company paid $4.1 million
in dividends or $0.421875 per share for the period from March 1, 2020 through May 31, 2020 to holders of record as of the close
of business on May 15, 2020 of our 6.75% Series C Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share
(“Series C Preferred Stock”). Dividends on our Series C Preferred Stock shares are cumulative and payable quarterly
at an annual rate of $1.6875 per share. Total dividends paid to our Series C Preferred Stock
shareholders for the six months ended June 30, 2020 amounted to $8.2 million.
On
July 1, 2020, the Company declared a dividend
of $0.421875 per share for the period from June 1, 2020 through August 31, 2020 to be paid on September 15, 2020 to Series C Preferred Stock shareholders of record as of the close of business on August 17, 2020.
6.375%
Series D Cumulative Redeemable Preferred Stock
On
June 15, 2020, the Company paid $2.1 million
in dividends or $0.3984375 per share for the period from March 1, 2020 through May 31, 2020 to holders of record as of the close
of business on May 15, 2020 of our 6.375% Series D Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share
(“Series D Preferred Stock”). Dividends on our Series D Preferred Stock shares are cumulative and payable quarterly
at an annual rate of $1.59375 per share. Total dividends paid to our Series D Preferred
Stock shareholders for the six months ended June 30, 2020 amounted to $4.2 million.
On
July 1, 2020, the Company declared a dividend
of $0.3984375 per share for the period from June 1, 2020 through August 31, 2020 to be paid on September 15, 2020 to Series D Preferred Stock shareholders of record as of the close of business on August 17, 2020.
Common
Stock At-The-Market Sales Program
On
May 14, 2020, the Company filed with the State Department of Assessments and Taxation of the State of Maryland (the “Maryland
SDAT”) an amendment to the Company’s charter to increase the Company’s authorized shares of common stock, par
value $0.10 per share (“Common Stock”), by 20 million shares.
On
June 30, 2020, the Company entered into an Equity Distribution Agreement (“Common ATM Program”) with BMO Capital Markets
Corp., B. Riley FBR, Inc., Compass Point Research & Trading, LLC, D.A. Davidson & Co., Janney Montgomery Scott LLC, and
J.P. Morgan Securities LLC, as distribution agents (the “Distribution Agents”) under which the Company may offer and
sell shares of the Company’s Common Stock, having an aggregate sales price of up to $100
million from time to time through the
Distribution Agents. Sales of the shares of Common Stock under the Common ATM Program, if any, will be in “at the market
offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through
the NYSE or on any other existing trading market for the Common Stock, as applicable, or to or through a market maker or any other
method permitted by law, including, without limitation, negotiated transactions and block trades. Shares of Common Stock sold
under the Common ATM Program are offered pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-238321),
filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2020, and declared effective on June 1, 2020
(the “2020 Registration Statement”), and the prospectus dated June 1, 2020 included in the 2020 Registration Statement
and the related prospectus supplement dated June 30, 2020. The Company has not sold any shares under this program as of June 30,
2020.
Preferred
Stock At-The-Market Sales Program
On
October 21, 2019, the Company entered into a Preferred Stock At-The-Market Sales Program (“2019 Preferred ATM Program”)
with B. Riley FBR, Inc. (“B. Riley”), as distribution agent, under which the Company may offer and sell shares of
the Company’s Series C Preferred Stock and/or Series D Preferred Stock, having an aggregate sales price of up to $100
million. Sales of shares under the 2019
Preferred ATM Program are “at the market offerings” as defined in Rule 415 under the Securities Act, including,
without limitation, sales made directly on or through the NYSE, or on any other existing trading market for the Series C Preferred
Stock or Series D Preferred Stock, as applicable, or to or through a market maker or any other method permitted by law, including,
without limitation, negotiated transactions and block trades. The Company began selling shares under the 2019 Preferred
ATM Program on October 22, 2019 and through June 30, 2020, 3.2
million shares of Series D Preferred Stock
were sold at a weighted average price of $25.09
per share, generating gross proceeds of
$80.5
million and net proceeds of $79.1
million, after offering expenses. Of these
amounts, during the six months ended June 30 2020, we sold 2.6
million shares at a weighted average price
of $25.06
per share, generating gross proceeds of
$64.1
million and net proceeds after offering
expenses of $63.1
million. As of June 30, 2020, $19.5
million in shares of Series C Preferred Stock and/or Series D Preferred Stock remained eligible for sale under the 2019 Preferred
ATM Program.
On
July 15, 2020, the Company filed with the Maryland State Department of Assessments and Taxation (“Maryland SDAT”)
Articles Supplementary reclassifying and designating 3.3 million shares of the Company’s Common Stock as shares of Series
D Preferred (See Note 10).
On
July 22, 2020, the Company entered into a new Preferred Stock At-The-Market Sales Program (“New Preferred ATM Program”)
with B. Riley, as distribution agent, under which the Company may offer and sell shares of the Company’s Series C Preferred
Stock and/or Series D Preferred Stock, having an aggregate sales price of up to $100
million. The New Preferred ATM Program
replaced the 2019 Preferred ATM Program (See Note 10).
NOTE
6 – STOCK BASED COMPENSATION
The
Company accounts for awards of stock options and restricted stock in accordance with ASC 718-10, Compensation-Stock Compensation.
ASC 718-10 requires that compensation cost for all stock awards be calculated and amortized over the service period (generally
equal to the vesting period). The compensation cost for stock option grants is determined using option pricing models, intended
to estimate the fair value of the awards at the grant date less estimated forfeitures. The compensation expense for restricted
stock is recognized based on the fair value of the restricted stock awards less estimated forfeitures. The fair value of restricted
stock awards is equal to the fair value of the Company’s stock on the grant date. Compensation costs of $313,000 and $887,000
have been recognized for the three and six months ended June 30, 2020, respectively, and $668,000 and $1.1 million have been recognized
for the three and six months ended June 30, 2019, respectively.
On
January 8, 2020, the Company awarded a total of 15,000 shares of restricted stock to three employees. The grant date fair value
of these restricted stock grants was $233,000. These grants vest ratably over five years.
On
January 15, 2020, the Company awarded a total of 11,000 shares of common stock to the members of our Board of Directors. The grant
date fair value of these awards was $177,000.
On
January 17, 2020, the Company granted options to purchase 10,000 shares of common stock to one participant in the Company’s
Amended and Restated 2013 Incentive Award Plan. The grant date fair value of these options amounted to $16,000. This grant vests
ratably over three years.
On
March 25, 2020, the Company granted options to purchase 690,000 shares of common stock to forty participants in the Company’s
Amended and Restated 2013 Incentive Award Plan. The grant date fair value of these options amounted to $653,000. These grants
vest ratably over five years. Compensation costs for grants issued to a participant who is of retirement age is recognized at
the time of the grant.
On
May 20, 2020, the Company granted options to purchase 15,000 shares of common stock to two participants in the Company’s
Amended and Restated 2013 Incentive Award Plan. The grant date fair value of these options amounted to $17,000. These grants vest
ratably over five years.
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the six months ended June 30, 2020 and 2019:
SCHEDULE OF FAIR VALUE OF OPTION GRANT OF WEIGHTED-AVERAGE ASSUMPTIONS
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
5.33
|
%
|
|
|
5.13
|
%
|
Expected volatility
|
|
|
24.57
|
%
|
|
|
24.04
|
%
|
Risk-free interest rate
|
|
|
0.89
|
%
|
|
|
2.50
|
%
|
Expected lives
|
|
|
10
|
|
|
|
10
|
|
Estimated forfeitures
|
|
|
0
|
|
|
|
0
|
|
The
weighted-average fair value of options granted during the six months ended June 30, 2020 and 2019 was $0.96 and $1.72 per share,
respectively.
During
the six months ended June 30, 2020, three participants exercised options to purchase a total of 29,000 shares of common stock
at a weighted-average exercise price of $10.55 per share for total proceeds of $306,000. The aggregate intrinsic value of options
exercised was $175,000.
As
of June 30, 2020, there were options outstanding to purchase 3.3 million shares, with an aggregate intrinsic value of $2.7 million.
There were 455,000 shares available for grant under the Amended and Restated 2013 Incentive Award Plan.
NOTE
7 - FAIR VALUE MEASUREMENTS
In
accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company measures certain financial assets and liabilities
at fair value on a recurring basis, including marketable securities. The fair value of these financial assets and liabilities
was determined using the following inputs at June 30, 2020 and December 31, 2019 (in thousands):
SUMMARY OF FINANCIAL ASSETS AND LIABILITIES RECOGNIZED AT FAIR VALUE ON A RECURRING BASIS
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
As of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities - Preferred stock
|
|
$
|
2,172
|
|
|
$
|
2,172
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Marketable Securities - Common stock
|
|
|
89,522
|
|
|
|
89,522
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
91,694
|
|
|
$
|
91,694
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities - Preferred stock
|
|
$
|
3,516
|
|
|
$
|
3,516
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Marketable Securities - Common stock
|
|
|
112,670
|
|
|
|
112,670
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
116,186
|
|
|
$
|
116,186
|
|
|
$
|
0
|
|
|
$
|
0
|
|
In
addition to the Company’s investments in marketable securities, the Company is required to disclose certain information
about the fair values of its other financial instruments, as defined in ASC 825-10, Financial Instruments. Estimates of fair value
are made at a specific point in time, based upon, where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company’s
entire holdings of a particular financial instrument. All of the Company’s Marketable Securities have quoted market prices
and traded in active markets and are therefore classified in Level 1 of the fair value hierarchy.
The
fair value of Cash and Cash Equivalents and Notes Receivable approximates their current carrying amounts since all such items
are short-term in nature. The fair value of variable rate Loans Payable approximate their current carrying amounts since such
amounts payable are at approximately a weighted-average current market rate of interest. As of June 30, 2020, the fair value of
Fixed Rate Mortgages Payable amounted to $383.5 million and the carrying value of Fixed Rate Mortgages Payable amounted to $372.8
million.
NOTE
8 – CONTINGENCIES, COMMITMENTS AND OTHER MATTERS
From
time to time, the Company may be subject to claims and litigation in the ordinary course of business. Management does not believe
that any such claims or litigation will have a material adverse effect on the financial position or results of operations.
On
May 7, 2020, the Company entered into contracts to purchase two communities, one in New York and one in Pennsylvania, for a total
purchase price of approximately $ million. These all-age communities contain a total of 315 developed homesites with a weighted-average
occupancy of 63%. The purchase of one community closed subsequent to quarter end (see Note 10) and the purchase of the remaining
community is expected to close later in the third quarter of 2020.
The
Company has an agreement with 21st Mortgage Corporation
(“21st Mortgage”) under which 21st Mortgage can provide financing for home purchasers in the Company’s communities.
The Company does not receive referral fees or other cash compensation under the agreement. If 21st Mortgage makes loans to purchasers
and those purchasers default on their loans and 21st Mortgage repossesses the homes securing such loans, the Company has agreed
to purchase from 21st Mortgage each such repossessed home for a price equal to 80%
to 95%
of the amount under each such loan, subject to certain adjustments. This agreement may be terminated by either party with 30 days
written notice. As of June 30, 2020, the total loan balance under this agreement was approximately $2.3
million. Additionally, 21st Mortgage previously
made loans to purchasers in certain communities we acquired. In conjunction with these acquisitions, the Company has agreed to
purchase from 21st Mortgage each repossessed home, if those purchasers default on their loans. The purchase price ranges from
55%
to 100%
of the amount under each such loan, subject to certain adjustments. As of June 30, 2020, the total loan balance owed to 21st Mortgage
with respect to homes in these acquired communities was approximately $2.2
million. Although this agreement is still
in effect, this program is not being utilized by the Company’s new customers as a source of financing.
S&F
entered into a Chattel Loan Origination, Sale and Servicing Agreement (“COP Program”) with Triad Financial Services,
effective January 1, 2016. Neither the Company, nor S&F, receive referral fees or other cash compensation under the agreement.
Customer loan applications are initially submitted to Triad for consideration by Triad’s portfolio of outside lenders. If
a loan application does not meet the criteria for outside financing, the application is then considered for financing under the
COP Program. If the loan is approved under the COP Program, then it is originated by Triad, assigned to S&F and then assigned
by S&F to the Company. Included in Notes and Other Receivables is approximately $29.2 million of loans that the Company acquired
under the COP Program as of June 30, 2020.
NOTE
9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash
paid for interest during the six months ended June 30, 2020 and 2019 was $8.8 million and $9.2 million, respectively. Interest
cost capitalized to Land Development was $547,000 and $614,000 for the six months ended June 30, 2020 and 2019, respectively.
During
the six months ended June 30, 2020 and 2019, the Company had Dividend Reinvestments of $1.7 million and $3.7 million respectively,
which required no cash transfers.
NOTE
10 – SUBSEQUENT EVENTS
Management
has evaluated subsequent events for disclosure and/or recognition in the financial statements through the date that the financial
statements were issued.
On
July 15, 2020, the Company filed with the Maryland SDAT Articles Supplementary reclassifying and designating 3.3
million shares of the Company’s
Common Stock as shares of Series D Preferred. Following the filing of the Articles Supplementary, the authorized capital stock
of the Company consists of 140.4
million shares of Common Stock, 4
million shares of Series B Preferred Stock,
13.8
million shares of Series C Preferred Stock,
9.3
million shares of Series D Preferred Stock
and 3
million shares of excess stock, par value
$0.10
per
share.
On
July 22, 2020, the Company entered into the New Preferred ATM Program with B. Riley, as distribution agent, under which
the Company may offer and sell shares of the Company’s Series C Preferred Stock and/or Series D Preferred Stock,
having an aggregate sales price of up to $100
million. Sales of shares under the New
Preferred ATM Program are “at the market offerings” as defined in Rule 415 under the Securities Act, including,
without limitation, sales made directly on or through the NYSE, or on any other existing trading market for the Series C Preferred
Stock or Series D Preferred Stock, as applicable, or to or through a market maker or any other method permitted
by law, including, without limitation, negotiated transactions and block trades. Shares of Series C Preferred Stock and/or
Series D Preferred Stock sold under the New Preferred ATM Program are offered pursuant to the Company’s 2020 Registration
Statement and are sold and issued pursuant to the Company’s prospectus dated June 1, 2020 included in the 2020 Registration
Statement and the related prospectus supplement dated July 22, 2020. The New Preferred ATM Program replaced the 2019 Preferred
ATM Program.
On
July 23, 2020, the Company drew down an additional $5 million on its unsecured revolving credit facility.
On
July 24, 2020, the Company acquired Camelot Woods, located in Pennsylvania, for approximately $3.3 million. This community contains
a total of 147 developed homesites that are situated on approximately 27 total acres. At the date of acquisition, the average
occupancy for this community was approximately 56%.