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

Good day, everyone, and thanks for joining us. I'd like to welcome you to the Flagship Communities REIT call covering results for the third quarter of 2025. Right now, everyone is in a listen-only mode. After the presentation, we'll have a short Q&A period for analysts and institutional investors. If you'd like to ask something during that session, please press *11 on your phone. I want to remind all of you that this conference call is being recorded. Speaking today are Kurt Keeney, Flagship's President and Chief Executive Officer, Nathan Smith, Chief Investment Officer, and Eddie Carlisle, Chief Financial Officer. Please be aware that remarks on today's call may include forward-looking information, which by its nature carries risks and uncertainties. Actual results could differ materially from the views expressed today. For more detail on these risks and uncertainties, please see the company's relevant filings on SEDAR. Those documents are also posted on Flagship's website at flagshipcommunities.com. Flagship has also put together a corresponding PowerPoint presentation, and it encourages you to follow along with it during this call. With that, I'll hand the call to Kurt Keeney. Kurt, you may begin.

Morning, everyone, and thanks for being with us today. The solid results we delivered across 2025 carried right through into the third quarter. Revenue and NOI are still rising at a double-digit pace, and the same is true for same community revenue and same community NOI. FFO and AFFO metrics also grew this quarter compared with last year. Beyond those financial results, we closed a strategic acquisition that stretched our footprint into Kentucky. We also announced recently that we are acquiring four communities, which will let us build out our presence in Indiana and Ohio. We expect these deals to be immediately accretive to AFFO. They gave us a chance to pick up underperforming MHCs carrying high vacancy, with added value coming through occupancy gains and lot expansion. Lot expansion has been a major area of focus for us and should serve as an important growth avenue ahead. Within our portfolio, we have pinpointed quite a few communities able to accommodate lot expansion. That lets us create additional housing opportunities inside certain existing communities for a modest capital investment. During 2024, we added 112 lots to the portfolio. Since then, customers have begun moving into the homes on those lots, and revenue from new residents is starting to come in.

We just kicked off a 36-lot expansion at one of our Kentucky properties that was 95% occupied. We figure it'll take about $15,000 per lot to get those lots into service, and we expect residents to move in over the next 24 months. This is a special year for our business. It marks not just the 30th anniversary for Nathan and me in the MHC industry, but also our fifth anniversary as a publicly traded REIT. Since our IPO, we've posted one of the strongest distribution growth records among Canadian REITs, and we've done that while cutting leverage and keeping a disciplined AFFO payout ratio. We're the only pure-play manufactured housing investment in the Canadian capital markets, and our REIT gives investors a chance to take part in a niche, stable market with meaningful growth, and we believe that potential is being proven in the marketplace. Since going public, unit price appreciation and a strong total return profile have outpaced many of our peers. For more than 20 years, the MHC industry has grown approximately 4% per year, beating all other real estate sectors. Our solid financial performance speaks to the strength of the business model through all economic cycles.

Having said that, I'll now hand things over to Nathan so he can share his comments. Nathan?

Thanks, Kurt. As owners and operators of communities, we aim to enhance the communities we already have, so they appeal more to people living there now as well as to newcomers. We adopt a hands-on style, constantly working to improve our communities via safety programs and added amenities. During the past year, pickleball courts, municipal-grade playgrounds, clubhouses, and other features have been introduced across our communities. We likewise offer a wide range of holiday and seasonal events—our back-to-school programs among them—that residents anticipate and take pleasure in together as a community. Through our home sales strategy, we also aim to swap older homes for new ones, and in that area we have achieved considerable success. We have performed very well with the portfolio we already hold, yet we simultaneously seek outside opportunities that meet our rigorous, disciplined standards. When making acquisitions we remain disciplined, concentrating on producing prudent growth for our unitholders. Our strategy consists of the following. First, we seek opportunities that will be accretive to AFFO per unit. Second, we pursue opportunities allowing us to simplify operations and achieve economies of scale. Last, we focus on acquisitions in our current markets and neighboring US states that share a comparable regulatory framework and similar characteristics.

The acquisitions we've completed recently really demonstrate how our growth strategy works in practice. During Q3, we picked up a 504-lot MHC situated in Lexington as well as Georgetown, Kentucky, and it's occupied at just about 72%. Starting in 2022, this MHC has seen substantial upgrades, among them the removal of roughly 50 older homes plus installation of new amenities — two municipal playgrounds, four new basketball courts, a new dog park, and a new community center. Not long ago, we completed two strategic acquisitions that extend our footprint in Indiana and Ohio. In Seymour, Indiana, we acquired a new community containing 744 lots, more than 90% of which are occupied. That property additionally has 85 lots set aside for future expansion. We also waived due diligence on acquiring a portfolio in the Greater Cincinnati area made up of three separate MHCs. Across those three MHCs there are close to 500 lots, with 65.5% of them occupied. Every community offers on-site amenities and sits near major employers, interstate highways, and retail centers. All of them lie within a 30-minute drive of our corporate headquarters in Northern Kentucky. These acquisitions further show our capacity to draw on more than 30 years of building industry relations in order to source off-market opportunities.

Here, the family and we go back 25 years. Now I'll hand things over to Eddie, our CFO, so he can walk us through how we did financially this quarter. Eddie?

Thanks, Nathan. Morning, everyone. Third-quarter revenue came in at $26.1 million, a 12.3% rise versus the same period a year ago, driven mainly by acquisitions, along with lot rent increases and higher occupancy throughout the portfolio. Same community revenue for the third quarter was $23.3 million, growing roughly 10% over the comparable period last year. That gain came from higher monthly lot rents, plus growth in same community occupancy and greater utility reimbursements and ancillary revenue agreements. NOI and NOI margin were $17 million and 65%, respectively, versus $15.1 million and 65% in the second quarter of 2024. Same community NOI margin for the third quarter was 64.7%, up 0.2% compared with last year. Although NOI rose thanks to ancillary services, NOI margins took a hit because those ancillary services carry lower margins than what we've historically achieved. FFO adjusted and FFO adjusted per unit for the quarter were $9.2 million and 36.5 cents, respectively, increases of 15.2% and 14.8% compared to 2024. AFFO adjusted and AFFO adjusted per unit for the quarter were $8.4 million and 33.3 cents, respectively, up 19.3% and 18.9% compared to 2024.

Occupancy in the same communities came in at 85.1%, up from 84.8% during the equivalent stretch a year earlier. Had we adjusted for the effects of our lot expansion program, total portfolio occupancy along with same community occupancy would have stood at 85.7%. In the ordinary course of business, we anticipate filling those lots and adding further lots to satisfy demand. We are constantly engaging with residents to ensure monthly rents come in on time. Collections of rent remain consistently in the high 90% range, and that pattern carried through the third quarter. During this quarter, rent collections reached 98.8%, versus 98.7% a year ago, which keeps showing how strong and predictable the MHC sector is. Total lot occupancy stood at 84.3% as of September 30, while our average monthly lot rent came to $483. Each of these figures landed within what we had expected. Our weighted average interest rate on mortgages and notes was 4.31%, and the weighted average term to maturity on those mortgages and notes was 9.1 years. As Nathan noted in his remarks, the acquisitions we closed recently were financed on appealing terms, which reaffirms our dedication to maintaining a conservative debt profile. Our Kentucky acquisition was financed using cash on hand together with roughly $17 million of assumed debt carrying an average interest rate of 3.5%.

Those 4 MHCs that we picked up earlier this month are being financed through a fresh unsecured term loan of $70 million. We're still well set up to pursue growth opportunities ahead, with extra leverage capacity available on our balance sheet. Total liquidity came to roughly $14.8 million. As of quarter-end, our REIT holds 20 unencumbered investment properties whose combined fair value is $78.8 million. With that said, I'll hand things back over to Kurt for a few closing remarks. Kurt?

Thanks, Eddie. Looking back over the past year—our fifth since becoming a publicly traded REIT—we feel a lot of pride in the progress we've made and everything we've accomplished. I mentioned earlier that this marks 30 years in the MHC business for Nathan and me. We entered this industry back in 1995. Our start was a single community with 152 lots, which we basically built from the ground up. Back then, our aim was to offer housing that was both sustainable and affordable, benefiting families along with the environment. Move ahead to the present, and that aim hasn't changed. We're in the early phases of our lot expansion program and keep evaluating opportunities across our portfolio to place new homes or swap out older ones, and to add amenities that build enhanced value. We anticipate these efforts will boost resident satisfaction as well as unitholder value. We also anticipated sustaining our strong performance and growth as we move forward. Home prices, steep monthly rents charged by multifamily rivals, and elevated mortgage rates have kept climbing, and this situation could push more people toward manufactured housing, since our communities stay affordable. We're still dedicated to providing steady, sustainable value to our unitholders via growth, integration, and operational excellence.

We appreciate our unitholders' continued backing and anticipate carrying on delivering long-term value as we move ahead. Thanks for spending time with us today; at this point I'll open the line for your questions.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press *11 on your telephone and then wait for your name to be announced. If you want to withdraw your question, just press *11 once more. Please stand by while we put together the Q&A roster. Our first question is from Mark Rothschild at Canaccord. Your line is open.

Appreciate it, and a good morning to all of you.

Morning to you, Mark.

Hi there — it looks to me like the fundamentals are still quite solid in every one of your markets. Could you say a bit more about the reasoning behind not driving rents at the same levels as 2025 and '24 as we move ahead, or at least when it comes to 2026? My assumption would be that you could likely push them even harder if you chose to.

You're right, and your observations are correct. We are not. We frankly know what the increases are, and it's actually become public for next year, for 2026. We believe the average increase is 5.7%, and it's about $28 on average across the portfolio. The reason, again, right now, is that inflation and other pressures on the resident are real, whether it's utilities or food or grocery prices. We're in a really good position because we haven't been overaggressive for the last 5 years. Our communities are typically still about $300 to $500 cheaper than the housing alternative, which is typically multifamily units. As those people get pressure, we don't want to pile on. Bear in mind, most of our leases are triple net leases, right? There are other components in there, whether it be real estate or the utilities that they pay directly. Again, the 5.7 is really a net 5.7. That's the working theory: pigs get fat, hogs get slaughtered, right? We just want to be a big fat pig, but

That's it.

My apologies, Nathan — I grabbed your question there. No problem at all.

Perhaps I could add just one more question building on that topic, regarding what your residents are able to handle. On cable revenue, should we expect continued growth there? Has that been moderating at all, and has anything specific happened recently that's causing it to perhaps not grow at the same rate?

Eddie, would you like to come in at this point? This is your program.

Yeah. Sure. On the regulatory side, the only real constraint is that we've now gotten to the point where we've largely rolled this out across most of the portfolio where it's feasible. We just launched roughly another 1,800 to 2,000 lots starting August 1st. A year ago, we rolled it out on July 1st. You are seeing somewhat of a slowdown in growth velocity on a year-over-year basis, and there are two reasons for that. A year ago, we added a larger number of lots than we could this year. Last year it was around 2,600 lots; this year it was closer to 2,000. That's why the year-over-year growth rate appears somewhat lower there. The only thing that would constrain it again would simply be whether we have lots where we don't currently offer it and where there's an opportunity to expand. The good news is that with the seven acquisitions we completed in 2025 — the five in West Virginia and two in Tennessee — none of those currently have bulk cable. And the acquisition we closed on in Indiana, along with the three in Cincinnati where we've waived diligence, none of those have it either. There will still be some opportunity as we head into next year.

My view is that this will keep working in our favor for what I'd describe as the coming 4 to 8 quarters. After that, with the acquisitions we make, we definitely view those as chances to keep generating growth inside the community, and where those programs aren't already running there, that's something we aim to put in place.

Excellent. Now I’ll hand it back over. Thank you very much.

Thanks. We move now to a question from Tom Callaghan at BMO Capital Markets. Your line is open.

Thank you. Good morning, everyone. I'd like to pick up on the questions Mark raised, specifically regarding revenue. If you factor that together with your outlook on same community expenses heading into 2026, what's your expectation for how same-property NOI growth will unfold next year?

Eddie, would you like to come in on that?

Right. Right. The way we've been framing it is that you're expecting us to achieve a 4% to 5% rent increase in the coming year, and actually a bit higher at 5.7%. We'll also pick up a 1% to 2% gain in occupancy. We've consistently said we believe we can keep delivering same community NOI growth in that high single digit to low double digit range. Revenue should track quite closely. In fact, for this quarter, same community revenue growth and NOI growth both came in at 10.2%. Again, I think that will ease somewhat as time goes on and we get the cable program rolled out more across the portfolio. In my mind, there's no reason we won't keep driving high single digits in same community NOI growth.

Thanks, that helps. I’ll shift topics to capital allocation for one more question. Clearly, deal activity has accelerated in recent months starting from Q2. Could you address two things: first, are there additional opportunities similar to those announced recently? Second, as Eddie mentioned in your remarks, how much additional capacity do you expect on the balance sheet once the $70 million transaction closes?

I'll cover the portion of what's available out there. Properties come onto the market all the time — we see them regularly. Circumstances shift in people's lives, families have to exit, and that sort of activity keeps showing up. In the marketplace, private equity is a bit less present because at today's interest rates they really can't achieve their returns. There are some smaller participants we do see active in the market, and REITs can probably be more effective at the moment than they were previously. Our acquisitions pipeline looks pretty robust, and we examine a lot of deals. We'll remain within the eight states where we currently operate and pursue bolt-on acquisitions in those.

On balance sheet capacity, Tom, honestly, we remain in fairly solid shape when you look at the balance sheet. Even following those acquisitions and the financings we just completed, we'll still sit right around that 40% debt-to-gross book value range. There's still some room left on the balance sheet. I believe we could add another $50 to $75 million quite comfortably in leverage on the balance sheet while keeping ourselves at a level we're still comfortable with from an overall leverage standpoint.

Fantastic. That’s excellent, everyone. Thanks so much.

Thanks. We'll now take a question from Jonathan Kelcher at TD Cowen. Your line's open.

Thanks. First, still on the balance sheet — there's that $70 million term loan. What are your plans for permanent financing on it, in terms of timing, the dollar amount, and the rate you expect to get?

Yes. We're working on the permanent financing right now. I expect it to close before November ends. It will be agency debt. This will be a 5-year deal, and the size is roughly the same. Proceeds should come to around 70 — call it $73, $74 million. The rate clearly remains uncertain since it hasn't been locked yet, but my expectation would be that it lands in the 6.25 range.

Right, so that's basically where the term loan sits at the moment, given where SOFR is—correct?

That's right, sir. Indeed, sir, you have that right.

All right. And then the second thing — you all mentioned chances to expand lots, and you did point out that single property with potential for 36 lots. For next year, how are we supposed to think about that? Roughly how many lots are you aiming to add?

Morning, Jonathan. When all is said and done, we have always talked about 50 to 100. I don't see us going beyond that. Within the company, we have 300 or 400 acres available for expansion that sit inside the community's existing footprint. You simply look at it, and once you reach the mid-90s, if you have the capability and feel confident, you would grow. Take this community as an example: we were at the mid-90s and could add 36 lots, and after that no land remains here. For next year, 50 to 100 is likely the correct range. Once more, it's a pleasant tailwind. If you keep at that every three or four years, it amounts to making an acquisition.

Yeah, no, definitely. And is $15K a lot sort of the figure to keep in mind?

For this specific property, we're talking roughly $15,000 per lot. The sewer mains had already been installed, and the grading work was finished. All that's left is putting in some driveways and the secondary electric.

All right, thank you. I’ll hand it back over.