What Flagship Communities Real Estate Investment Trust (MHC.UN) Said on Its Q3 Earnings Call

Key Points

• Q3 performance improved: Revenue rose 17.6% to $30.7 million and NOI increased to $20 million, supported by acquisitions, rent increases and stronger occupancy. Adjusted FFO per unit rose 6.8% to $0.39.
• Growth outlook remains strong: Flagship plans an average 5.6% rent increase in 2027 and says executing its strategy and filling vacant lots could deliver high-single-digit to low-double-digit NOI growth.
• Capital and portfolio plans: The REIT raised its monthly distribution 5.9%, intends to launch a share-repurchase bid for up to about 10% of its public float, and reported 38% debt to gross book value with no substantial debt maturities until 2030.

Flagship Communities Real Estate Investment Trust TSE: MHC.UN reported higher third-quarter revenue and net operating income as acquisitions and rent increases added to growth across its existing manufactured housing communities.

The REIT also outlined plans for a 5.6% average rent increase in 2027. President and CEO Kurt Keeney said the company should be able to generate high-single-digit to low-double-digit net operating income growth by executing its strategy and filling vacant lots.

Third-Quarter Results

Revenue rose 17.6% from a year earlier to $30.7 million, driven by acquisitions and lot rate increases, Chief Financial Officer Eddie Carlisle said. Net operating income (NOI) increased to $20 million from $17 million, while the NOI margin widened to 65.3% from 65%.

For the same-community portfolio, revenue increased 6.9% to $27.5 million and NOI rose 7.2% to $17.9 million. The same-community NOI margin was 65.1%, up 0.1% from a year earlier. Carlisle attributed the revenue growth to higher monthly lot rents and ancillary revenue, along with increased occupancy.

Adjusted funds from operations (FFO) rose 8.2% to $9.9 million, or $0.39 per unit. Adjusted adjusted funds from operations (AFFO) increased 6.3% to $8.9 million, or $0.35 per unit. The per-unit figures rose 6.8% and 5.1%, respectively.

Same-community occupancy was 85.2%, up 1.8% from the end of last year, while rent collections for the quarter were 99.2%. Total lot occupancy was 84.6% at September 30, and average monthly lot rent was $516.

During the analyst discussion, Carlisle said the improvement in same-community NOI growth reflected a recovery in utility cost recapture and margins after winter weather created utility and maintenance challenges earlier in the year. Utility recapture returned to above 90% in the third quarter, he said, adding that the company should be able to maintain that level in the fourth quarter absent extreme weather.

Rent and Occupancy Outlook

Keeney said residents have been notified of the 2027 rent increase, which averages approximately $29. He said the REIT generally targets occupancy growth of 1% to 2%, although he considers 1% the appropriate modeling assumption because homes turn over as the company upgrades its communities.

Asked whether the rent and occupancy outlook supported high-single-digit same-store NOI growth next year, Keeney said the company had acquired enough vacancy over the past two years to support growth for the next two or three years. He said executing the existing strategy should produce high-single-digit to low-double-digit NOI growth.

Keeney also said Flagship aims to reduce rental homes to less than 10% of its total lots over the next year or two, from roughly 11.5% to 12%. The company sells some homes to existing residents and removes and sells older homes, he said, but does not expect to leave the rental business entirely because acquisitions often include rental homes.

Carlisle said a margin around 65% would meet his expectations for the fourth quarter and next year, while noting that weather can affect quarterly results.

Acquisitions and Capital Allocation

Flagship acquired a 125-lot community in Frankfort, Kentucky, for approximately $2 million during the quarter. The property is 54% occupied and is near four other Flagship communities, Chief Investment Officer Nathan Smith said. Planned additions include a clubhouse, office, basketball court and playground.

Smith said the REIT has completed three acquisitions this year, but higher interest rates have contributed to light deal flow across the industry. He said Flagship continues to seek accretive purchases, often from smaller owners exiting the business.

Keeney said the company has two or three entitled developments in its queue and expects to bring 50 to 100 lots online next year, with 50 more likely. He said buying existing vacant lots is often a better use of capital than development.

The board approved a 5.9% increase in the monthly distribution, marking the sixth consecutive annual increase, Keeney said. The REIT also announced its intention to launch a normal course issuer bid that would allow it to repurchase up to approximately 10% of its public float.

Balance Sheet

At September 30, Flagship had approximately $30.9 million in liquidity and 18 unencumbered investment properties with a combined fair value of approximately $106 million. Its weighted average mortgage interest rate was 4.54%, with a weighted average term to maturity of 7.6 years. Carlisle said the REIT has no substantial debt maturities until 2030.

During the question-and-answer session, Carlisle estimated that Flagship could fund $100 million to $125 million in acquisitions on its balance sheet without much difficulty. He said debt to gross book value had declined to 38% in the quarter.

About Flagship Communities Real Estate Investment Trust (TSE:MHC.UN)

Flagship Communities Real Estate Investment Trust is a leading operator of affordable residential MHCs primarily serving working families seeking affordable home ownership. The REIT owns and operates exceptional residential living experiences and investment opportunities in family-oriented communities in Kentucky, Indiana, Ohio, Tennessee, Arkansas, Missouri, West Virginia, and Illinois.

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