Flagship Communities Real Estate Investment Trust (MHCUN) Earnings Call Transcript

Thanks, operator. Morning, everyone, and I appreciate you joining us. The solid results from the first half of 2026 continued into Q3. Revenue and NOI both grew by double digits, and we're still seeing improvement in same-community revenue and same-community NOI — a reflection of how strong our core business is and how stable the MHC industry remains. Same-community revenue was $27.5 million, which is 6.9% higher than the same period last year. Same-community NOI came to $17.9 million, up 7.2% versus the same period last year. And same-community NOI margin stood at 65.1%, an increase of 0.1% compared to the same period last year. Alongside solid operational and financial performance, we completed the strategic purchase of a 125-lot manufactured housing community located in Kentucky, the state where we are headquartered. That deal fits our approach of acquiring stabilized properties that come with room to grow occupancy. Nathan will share further details when he speaks. Given how well we have done so far this year, our Board felt confident enough to green-light a 5.9% bump in the monthly distribution paid to unitholders. That makes six years running of distribution increases; we count ourselves quite lucky to have lifted distributions annually ever since our IPO while simultaneously holding our AFFO payout ratio under 50% and keeping the balance sheet conservative. Looking at Slide 6, you'll see our distribution growth track record ranks among the best of any Canadian REIT. We've delivered a 5.2% compound annual growth rate on distributions, and they're up almost 36% since our IPO. Growing distributions annually is only one element of how we allocate capital with discipline. We're also continuing to chase accretive acquisitions in our core markets, which will lift AFFO per unit and help sustain distribution growth. Alongside that, we said we plan to start an NCIB, letting us buy back as much as roughly 10% of our public float. A big factor behind our success is how deeply experienced we are in this industry. Nathan and I just completed our 31st year in manufactured housing, and the qualities that drew us to this industry decades ago still hold true. As Slide 8 of this presentation shows, the MHC sector has expanded roughly 4% annually for more than 20 years, beating every other real estate sector. Even through the housing crisis and the Great Recession, NOI growth stayed positive, and it proved resilient again during the pandemic. In the current environment, sales of traditional homes and condos have fallen, largely because of higher prices, tighter credit, persistently elevated mortgage rates and broader economic uncertainty. Owning a home in our portfolio, plus building long-term equity, costs less than renting a three-bedroom apartment. That's exactly why Flagship continues to stand out as an appealing option compared with conventional rental housing. Having said that, I'll hand things over to Nathan now for his comments. Nathan?

Thanks, Kurt. Good morning, everyone. Flagship began with a single community and 152 lots. Across more than 31 years, one major factor behind our success has been keeping residents in our communities and getting acquisitions across the finish line. During the quarter just ended, we acquired 125 home sites in Kentucky, our home state, for roughly $2 million. That community sits at 54% occupancy and is in Frankfort, Kentucky, a place where demand for affordable housing runs high. Frankfort serves as Kentucky's capital and hosts major employers along with the biggest concentration of public administration jobs anywhere in the state; and as with acquisitions we have made before, we intend to bring in new amenities that improve life for residents. Among the planned upgrades are a new clubhouse and office, a basketball court and a playground. By putting money into new amenities, we think residents become more likely to remain in our communities, and through ongoing work to strengthen infrastructure and community engagement initiatives, we help foster a positive experience and keep our residents for the long term. This deal also shows how we can expand and capture efficiencies within our markets; this MHC sits close to 4 communities owned by Flagship in Kentucky, which lets us operate these properties effectively. We stay disciplined in how we pursue acquisitions while concentrating on solid organic growth and creating value for our unitholders. With that, I will hand things to Eddie so he can walk through our financial results in more detail. Eddie?

Thanks, Nathan. Good morning, everyone. In the third quarter, we kept producing solid financial results from our organic portfolio, and we maintained a strong, stable balance sheet at the same time. Quarterly revenue came in at $30.7 million, up 17.6% from the same period a year earlier, driven by acquisitions and by lot rent increases across the portfolio. Same-community revenue for the third quarter was $27.5 million, growing roughly 6.9% versus the comparable period last year. Higher monthly lot rents and ancillary revenues drove that gain, along with an increase in same-community occupancy. Net operating income was $20 million and the NOI margin was 65.3%, versus $17 million and 65% in the same period last year. For the third quarter, same-community NOI margin was 65.1%, up 0.1% over last year. FFO adjusted came to $9.9 million and FFO adjusted per unit was $0.39 for the quarter, increases of 8.2% and 6.8%, respectively, compared with last year. AFFO adjusted was $8.9 million and AFFO adjusted per unit was $0.35 for the quarter, up 6.3% and 5.1%, respectively, compared with last year. Same-community occupancy was 85.2%, an increase of 1.8% from the end of last year, and rent collections for the quarter reached 99.2%, which shows the strength and consistency of the MHC sector. Total lot occupancy stood at 84.6% as at September 30, also up relative to the end of last year, and our average monthly lot rent was $516. We stay focused on keeping a strong and conservative balance sheet, with an emphasis on long-dated fixed-rate debt. Our weighted average mortgage interest rate was 4.54%, and our weighted average mortgage term to maturity was 7.6 years. We have no substantial debt maturities until 2030. Total liquidity was approximately $30.9 million. As at September 30, 2026, the REIT currently has 18 unencumbered investment properties with a total fair value of approximately $106 million; with that, I'll turn it back over to Kurt for some final remarks. Kurt?

Thanks, Eddie. With 2026 almost behind us, I feel good about what the team has accomplished. During the first 9 months, same-community revenue and NOI both increased, we brought new communities online in our core markets, and our Board approved a sixth straight annual distribution increase. The priorities we carry into next year are the very ones that brought us here. We plan to keep investing in the resident experience while also improving our operational efficiencies. And we'll keep prioritizing returning capital to unitholders from a position of financial strength, with a conservative balance sheet and no substantial debt maturities until 2030. We stay confident about the outlook for our business and the MHC industry, since housing prices, high monthly rental rates among multifamily competitors and mortgage rate increases could lead more people toward manufactured housing, because our homes remain affordable. Thanks for your time today, and I'll now open the line for questions.

So, regarding same-property NOI growth, which rose somewhat this quarter compared with what we saw earlier in the year, it really doesn't seem to come from occupancy, and the rental rate increases went through earlier in the year. So, assuming it's more on ancillary revenue, could you just talk a little about what may have picked up this quarter and whether this is a trend we should see continue?

Yes, do you want to jump in?

Absolutely. Mark, what really drove things is that the first 2 quarters of this year were, as you know, pretty well documented. We spent a lot of time discussing the problems caused by winter weather, with utility recapture and quite a bit of maintenance, repairs and maintenance. By the third quarter, that had largely been resolved; utility recapture is now back above 90% for the first time this year, and margins are trending back up above 65%, so that accounts for the largest part of it. Ancillary revenues are up slightly. That said, yes, I would expect the — assuming we don't run into some extreme weather again in the fourth quarter, I would expect that growth in margin increase to be present in Q4 as well.

All right. Fantastic. Perhaps one final question from my side. Regarding acquisitions, you've occasionally mentioned private equity moving into and out of the business. How do higher bond yields affect your view on that, and how do you see deal flow? Do you think they might simply drop out because the numbers don't work? Or could it be that deals just won't be as appealing for you either, given higher interest rates?

Well, Mark, I suppose what I'd tell you is that we're seeing very little private equity at the moment, for precisely the reason you just mentioned. We've actually completed 3 acquisitions this year, and hopefully we'll have a few more if we're lucky. But what we're really seeing out there is that the industry isn't having many acquisitions because of the interest rate. So private equity is struggling. And obviously, we're looking for accretive deals, and we've completed 3 accretive deals this year. So we'll keep looking for those. But we are seeing deal flow out there being very light among everybody else, really.

I suppose I'll stay on the acquisition topic; it seems like we're simply in a sluggish stretch at the moment. Does that suggest that for next year we should anticipate acquisitions of roughly the same size as the ones you completed this year, meaning on the smaller side, around $5 million-ish, give or take?

This industry, after all, has forever rested on singles and doubles. So my sense is you'll keep seeing singles regardless. We seek out mom-and-pops looking to exit, and when those opportunities arise you have to seize them, which is exactly where we stand today. We're completing 3 this year; yet we remain largely a single-property business; this isn't a sector where you're going to acquire 25 properties. That simply won't happen. So it rests on singles and doubles, and we'll carry on in that fashion.

All right, that's fair. Then just regarding — I suppose, on occupancy and also the revenue side, have you disclosed or stated what the rate increase will be for next year? And second, how far do you believe you can drive occupancy on a same-property basis?

Yeah. We in fact did — we've in fact posted and informed our residents about the rent increase for 2027 already. So it's out there publicly. It averages 5.6% globally and comes to roughly $29. And so yes, I think that's — and once more, we always, sort of, stay within a typical band of 4% to 5%. This year, it's 5.6%. But — so we're quite deliberate about attempting to self-regulate where rent is concerned. And, so no, I think that's — it's been available now for a couple of weeks. Regarding occupancy, again, we, sort of, guide 1% to 2%. I always believe from a modeling standpoint, 1% is the correct approach to model it, since we will turn over units because — and upgrade the communities' inventory; but just to remind you, 75% of our customers own their house outright. They're not rentals. So, you have to, sort of, contend with that as they turn over in the fullness of time; so, as we turn those units over, that's always a bit of a headwind while we're making the rest of our occupancy gains, because you can't let the 1972 Windsor stay in the community.

Regarding what you expect for rent growth, I believe you cited 5.6%, occupancy improvement of 1% to 2%, and something you've been saying for many years now. So does that mean — I mean, is the setup still in place for — again, still there for high single-digit same-store NOI growth next year?

That's precisely where we stand. Sorry, Eddie, would you like to go ahead?

No, no, please continue. My apologies.

That's pretty much exactly where things stand for us. What Nathan pulled off for us over the last 2 years is genuinely great, because he bought the vacancy we're going to need for the next 2 or 3 years. So we can literally push our NOI, and that is what we're doing; and if we simply show up, put in the work and stay true to who we are, we don't have to do anything out of the ordinary. We just have to, more or less, carry out our strategy, and we ought to see high single-digit, low double-digit NOI growth.

Great. Then regarding that mid-5% rent bump, which is comparable to last year too, clearly. Is that something you're choosing on your own? Do you figure there's additional room for tenants to absorb even bigger rent increases?

Well, the answer is that you must be self-disciplined. If you recall, under our leases the residents handle their utilities themselves. Everything from electric to water, sewer, and cable comes out of their pocket. And inflation affects every one of those items. So in looking at that, we simply want to keep in mind that rent represents just one portion of their housing cost, since most of the time they do own their home. So, you examine it and you say, okay. Is there additional room? If you open up your Excel spreadsheet, the answer is yes. Typically we run $300 to $500 below a comparable multifamily housing product. That therefore gives us runway, though it doesn't mean we ought to push that any faster. Again, 30%, 40% of my residents live on fixed income, Social Security disability, perhaps a pension plan. And so we want to ensure those folks stay healthy; so yes, the answer is yes, there's runway, but you should be self-disciplined.

Understood. Alright. And here's the final quick one. Regarding CapEx for the coming year, what's the right way to frame our CapEx budget for next year?

Our approach is to look at cash flow. That's the lens we use; we examine it alongside our excess cash flow, which comes to about $18 million or so. As opportunities allow, we'll keep drawing down the rental fleet. Where we can, we'll also need to upgrade the rental fleet somewhat; but at present, I'd say our CapEx is really just growth projects, and we'll deploy our capital, our net cash flow of $18 million to $20 million. That money will go toward growth initiatives; and — but as things stand, I'd say we're in really good shape on CapEx for next year.

To pick up where Himanshu left off, regarding the growth projects, could you update us on the status of your lot expansion program and what new lots might be delivered over the coming few quarters?

Absolutely; at present we have 2 or 3 entitled developments in the queue that are lined up. My expectation is that we'd likely bring only 50 lots from that online next year. I've mentioned this on many occasions — we are developers. We understand how to do this; in our view, the best use of capital frequently is not developing but purchasing vacancy that has already been developed, and that is what we've been doing; so I think next year, 50 to 100, and I'd probably bet on 50.

All right. And if those acquisition chances did come up, what amount of room does the balance sheet have right now, in terms of overall capacity, for new acquisitions?

Eddie, would you like to take that one?

Absolutely. Yeah, Brad, my sense is that we could likely complete somewhere in the range of $100 million to $125 million of acquisitions using our balance sheet without running into much trouble; at present we have roughly $110 million in unencumbered assets sitting on that balance sheet. This quarter our debt to GBV has fallen to 38%, so the balance sheet clearly gives us the room to go out and pursue acquisitions as opportunities arise.

All right. So right now, you're describing the market as fairly quiet. Is there anything at this point that gives you a signal about pricing shifts at all?

Pricing is changing only minimally, from what we can see. And yet wide pricing swings have never been something we've witnessed in manufactured housing; so that's — I mean, this question gets raised constantly, and I appreciate you asking it. But across almost soon to be 32 years, I have never witnessed pricing move a whole lot in the MH business. Certain pricing you'll encounter is higher, but achieving it is also a really heavy lift. So — yet most of it, as we've consistently said, trades somewhere between 5% and 7% cap and has and will keep doing so in the foreseeable future as I see it. It's simply a matter of supply and demand.

That's what's happening in our markets, Brad — like down in, if you go to Florida, cap rates just keep falling and falling. That's a difference, I mean.

Expect a 3 cap.