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

Good day, everyone, and thank you for joining us. I'd like to welcome you to the Flagship Communities REIT earnings call for the fourth quarter of 2025. Please be aware that this call is being recorded. Our speakers today include Kurt Keeney, who serves as President and Chief Executive Officer of Flagship, along with Nathan Smith, our Chief Investment Officer, and Eddie Carlisle, our Chief Financial Officer. I want to point out that statements made during this call might include forward-looking information, which inherently carries risks and uncertainties. Outcomes could vary significantly from what is expressed today. If you'd like more detail regarding these risks and uncertainties, we encourage you to review the company's applicable filings on SEDAR. Those documents can also be accessed through Flagship's website, flagshipcommunities.com. In addition, Flagship has put together a PowerPoint presentation that corresponds with this call, and we invite you to follow along with it. At this point, I'll turn things over to Kurt Keeney.

Thank you, operator. Good morning, everyone, and thanks for being with us today. For Flagship, 2025 marked a milestone year. We marked our fifth year as a publicly traded REIT, as well as 30 years for Nathan and me in the MHC industry. All through 2025, we kept carrying out the disciplined strategy that has characterized Flagship from the time of our IPO, delivering growth while keeping our balance sheet strong. We recorded notable gains in rental revenues, NOI, FFO adjusted, and AFFO adjusted — each of which has risen steadily across the last few years, as you can see on slides 4 and 5 of the presentation that accompanies this call. We also keep seeing robust year-over-year same-community metric performance, which remains the clearest signal of the underlying health of our business. Same-community revenue rose 10.9% over 2024 and 8.2% over Q4 of last year. Same-community NOI rose 11% over 2024 and 5.9% over Q4 of last year, and same-community NOI margin held steady at 66.2% for the year. Those solid results let us announce a 5% increase to our monthly cash distribution for the fifth consecutive year. From our IPO onward, we have delivered one of the strongest distribution growth records among Canadian REITs, all while lowering leverage and keeping a disciplined AFFO payout ratio.

Beyond the solid financial results we delivered, we're still quite active when it comes to acquisitions. In the quarter, we grew our footprint in Indiana and Ohio by completing two strategic acquisitions. Those deals, together with the others we closed during the last year, give us sufficient vacancy to keep creating value by growing occupancy and expanding lots over the coming few years. With the capacity on our balance sheet and the ability to access debt at attractive pricing, we chose not to renew our at-the-market equity program in mid-2025. Our focus stays on accretive growth, with balance sheet leverage serving as the main source of funding. I'll hand things over now to Nathan, who will share more detail about our operating regions and growth strategy. Nathan?

Thanks, Kurt, and good morning, everyone. A big reason this past year went well was that we were able to get strategic acquisitions over the finish line. During the fourth quarter, we closed on a new community in Seymour, Indiana, which is more than 90% occupied. That property also comes with 85 lots available for future expansion. We also finished acquiring a portfolio in the greater Cincinnati area, comprising 500 lots spread across three separate MHC communities. With acquisitions, location is crucial. Every one of these communities sits in a major metropolitan area with diverse employment opportunities where we already operate. Beyond location, how good the community itself is matters just as much. As operators, our aim is also to enhance the communities we already own, and we accomplish that by investing continuously, in both amenities and safety. During 2025, we added amenities throughout the portfolio and grew our Flock camera security system to almost 1/4 of our communities. In the five years since our IPO, acquisitions have been a key driver of our success, and we anticipate they will remain a key driver of our growth. Our capacity to draw on 31+ years of industry relations to source off-market opportunities reflects the experience of our team and our strong reputation in the marketplace.

Our strategy is designed to help make sure we achieve disciplined growth for our unitholders. We pursue opportunities that will be accretive to AFFO per unit. We also look for opportunities that let us streamline operations and achieve economies of scale. And lastly, we focus on acquisitions in our current markets and neighboring US states that share a similar regulatory framework and characteristics. The acquisitions we made in the fourth quarter are ideal illustrations of our growth strategy in action. We already have operations in Indiana and the greater Cincinnati area, where we maximize efficiencies and take advantage of economy of scale. At this point I'll hand it over to Eddie, our CFO, to discuss our financial performance. Eddie?

Thanks, Nathan. Good morning, everyone. In the fourth quarter, revenue came in at $27.5 million, representing a 15.6% rise compared with the same period a year earlier, driven mainly by acquisitions and by lot rent increases throughout the portfolio. For the full year, revenue reached $103.4 million, a gain of 17.3% for those same reasons. Same-community revenues for the fourth quarter and for full year 2025 rose 8.2% and 10.9%, respectively, versus the comparable periods a year ago. Those gains came from higher monthly lot rents as well as greater utility reimbursements. Ancillary revenues — made up of amenity fees, including cable and internet reimbursements — also contributed. Net operating income and NOI margin were $18.4 million and 67%, respectively, versus $15.9 million and 67% in the fourth quarter of 2024. For the year ended December 31, 2024, NOI and NOI margin were $68.4 million and 66.2%, respectively, versus $58.4 million and 66.3% last year. Same-community NOI margins for the fourth quarter and full year 2025 were 66.6% and 66.2%, respectively. Although NOI benefited from an increase in ancillary services, NOI margins took a negative hit because those ancillary services carry a lower margin than the REIT has historically achieved.

For the fourth quarter of 2025, FFO adjusted came in at $9.4 million, which is up 20.3% versus the same period a year earlier. FFO adjusted per unit in Q4 2025 was 37 cents, marking a 20% gain over the same period in 2024. For the full year, FFO adjusted totaled $36.1 million and FFO adjusted per unit was $1.44, reflecting increases of 19.7% and 13.4%, respectively, against 2024. AFFO adjusted for the fourth quarter of 2025 was $8.5 million, a rise of 12.4% from the same period last year. AFFO adjusted per unit in Q4 2025 came to 34 cents, up 12.3% compared with the same period in 2024. On a full-year basis, AFFO adjusted was $32.9 million and AFFO adjusted per unit was $1.31, representing gains of 20.7% and 14.4%, respectively, over 2024. Same-community occupancy stood at 83.9%, down 0.2% from last year. That slight decrease stemmed from adding expansion lots as well as some modest weather effects in December. Absent those factors, same-community occupancy would have matched 2024 levels. Consistent with earlier expansions, we anticipate these lots will be leased in the ordinary course of business. Rent collections came in at 99% for the fourth quarter and 99.2% for the year ended 2025, which were modest improvements over the comparable periods a year ago.

That, again, highlights how solid and dependable the MHC sector is. Total lot occupancy stood at 82.9% as of December 31, while average monthly lot rent came in at $483. Each of those figures landed right where we expected. On our mortgage and note debt, the weighted average interest rate was 4.54%, and the weighted average term to maturity was 8.2 years. Total liquidity — meaning cash, cash equivalents, and available capacity under our lines of credit — was roughly $19.7 million. As of December 31, 2025, the REIT holds 20 unencumbered investment properties whose total fair value is $123.1 million. With that, I'll hand things back to Kurt for some closing comments. Kurt?

Thanks, Eddie. As we head into 2026, our confidence in what lies ahead for manufactured housing hasn't wavered. Two major factors back up that view, and each one is specific to our industry. First, for a great many Americans, our homes represent a more economical choice. Compared with renting in a multi-family apartment, our homes cost less. What our customers get are detached residences sharing no walls, no utilities, no air conditioning, and no heating with any neighboring home. These homes come with two, three, or four bedrooms, usually featuring two bathrooms. They also provide a deck, a yard, a driveway, and laundry facilities inside the home. In contrast to multi-family apartments, the supply of new manufactured housing communities stays persistently constrained. Regulatory restrictions at multiple levels, competing uses for land, and a shortage of zoned land have together erected steep barriers, both for new manufactured housing supply and for newcomers trying to enter our market. That explains the competitive edge we hold in our industry. Among MHC operators in the Midwest region, we rank as one of the largest, and our position within the MHC industry remains strong. The industry is still quite fragmented: the top 50 MHC investors are estimated to control roughly 17% of the 4.3 million manufactured housing lots across the United States.

Our flagship offerings give investors access to an asset class that has proven resilient, one with organic growth potential and a disciplined approach to acquisitions. We truly appreciate the time you've given us today, and at this point I'll turn the call over to your questions.

Thanks. If you'd like to ask a question, hit *11 on your phone and hang tight until your name gets called. If you want to take your question back, just press *11 once more. Please hold on while we put together the Q&A roster. Mark Rothschild from Canaccord is up first. Your line is open now.

Thanks, and good morning, everyone. For this first question—maybe it's for Nathan, I'm not certain—but when you look at the cost of debt you're getting now and that you put on the recent acquisitions, could you just talk a bit more about the cap rates you're willing to pay and that you're seeing for deals, and then perhaps how do you think about the going-in returns with the more expensive cost of debt?

Let me begin with that, Mark. Having been a public company for more than five years now, and with 31 years in this business, Kurt, Eddie, and I have consistently observed that the majority of manufactured housing communities trade at cap rates somewhere between 5 and 7 — and they remain right in that range. Nothing has shifted. When families decide to exit, given how few of these properties ever come up for sale, they end up selling at a cap somewhere between 5 and 7. We keep seeing that pattern. It has not changed in 31 years. Have we acquired properties at 9 caps? Yes, we have, but a 9 cap demands a great deal of work, and we are accustomed to working hard, though there is a limit to how many of those you can absorb. We also steer clear of 3.5 caps in Florida. In the Midwest and the Upper South, we operate between a 5 and 7 cap and have not witnessed any shift, even once the debt structures are in place. The acquisitions we completed roughly 18 months ago have performed really well, and you are beginning to see some genuine positives. I will have Eddie go into the debt in a bit more detail.

The one point I'd make, Mark, is that whenever we evaluate these acquisitions, the crucial question is really: what levers exist for generating returns? The in-place cap rate might be 5, 6%, but what opportunities are available? Are there chances for us to apply our sub-meter utilities strategy, which has genuinely helped us when we enter these acquisitions? How does the lot rent in the current portfolio you're examining compare with the market? Are opportunities present there? Then, naturally, there's occupancy. Last year, one thing we managed to accomplish was purchasing vacancies for the next couple years — right, the acquisitions we completed around the Cincinnati area that were only about 70% occupied. Of course, when you look at the cap rate and year one accretion, it's still going to be tight, and we'll simply have to implement our strategy and really ensure that other opportunities exist within those communities and acquisitions we're buying so we can grow it into an accretive acquisition.

Great, thanks. Perhaps just one more from me. For a few years now, you've been posting some really solid occupancy gains. This quarter, though, the same-property occupancy growth simply wasn't present. Is that more of a seasonal matter or merely a temporary one, or do you believe that within the same-property portfolio it will become tougher to extract further occupancy improvements?

No, I think you've got it right. We definitely ran into some seasonality that caught up with us, especially in December. We had some weather problems. They really kicked in during the first week of December. Snow hit most of our markets in that first week of December. That's roughly a month off. It really kept us from releasing because snow came right before the holidays. We've actually already seen the same-community metric rebound somewhat in February. That was really all it was. Just some weather, and we had rentals go vacant, and it's hard to get people to renew around the holidays. Then January arrived and weather hit us pretty hard once more. It looks like we've gotten past that, so I don't believe same-community metrics have fully matured at all. I still think you'll see 1 to 2% occupancy growth through homeownership. You're right. We got caught by a bit of seasonality and some weather in December, but nothing that keeps us up at night.

That’s great. I really appreciate it.

Thanks. Our upcoming question is from Jonathan Kelcher at TD Cowen. Your line is open now.

Thanks. Morning, everyone. My first question is about that lower margin in ancillary services, which kind of weighed on same-property operating margins this quarter. Has that been rolled out across the entire portfolio at this point?

Eddie, would you like to come in at this point?

Yes, absolutely. No, we definitely haven't implemented those across the whole portfolio. At present, ancillary revenues account for roughly 75% of our lots. Reaching 100% isn't realistic. Some locations simply make it impractical. We still have some room left to grow there—I'd say at minimum another year's worth, for sure. What we are observing, though, is that—as you mentioned—the rollout we completed in Q3 of 2025 involved a smaller set of lots and communities compared with the prior year. And when you look at same-community NOI growth on a year-over-year basis, that has contributed to the dip you saw in Q4, where that growth had been running around 1 1/2 to 2% on a same-community basis. It decelerated to roughly 3/4 of a percent in Q4.

All right. After the full rollout is complete, what's the right way for us to frame revenue growth? Should it track the same rate as rental rate growth overall?

We do have governor provisions in our agreements with the cable operators, and those should remain fairly stable, with growth likely at a somewhat lower pace, correct? Typically, what you'll see is something like CPI applied to those particular services.

That's useful. And then second, there's a major single-family rental piece of legislation moving through Congress at the moment. Do you expect the MHC business to feel any effect from it?

I'll take that one. At first, we weren't included at all. Manufactured housing didn't appear anywhere in that bill. Then all at once the White House released a letter, which was a bit odd. Making public statements about bills isn't something they usually do. Then, as it moved through the Senate, manufactured housing got added to the bill with language saying it's excluded. The bill states explicitly that MHCs are excluded. We feel fairly comfortable about that. What's interesting is that we weren't nearly as agitated as a lot of other folks, since our rental count just isn't that large. That isn't how we operate. Home sales are our model, but if you run a rental model where you're leasing the home to the customer, that could have been truly, truly troublesome. With us, it simply wasn't as troublesome. We have only 1,600, 1,800, roughly in that range. Last year we sold 111 and brought in 115, 116, 156, I believe. That simply isn't how we operate. So again, though it worried the industry when it appeared, it worried us less, given our homeownership model.

That's great, thank you — and I'll hand it back over.

Thanks. Our following question is from Kyle Stanley at Desjardins. Your line is open now.

Appreciate it. Good morning, everyone.

Kyle, good morning.

Good morning there, Kyle.

I'd like to dig into what fed into the 14 basis points of cap rate compression we saw this quarter. You've clearly been busy on the acquisition side. Nathan, I believe you offered some useful remarks earlier about cap rates sitting in the 5 to 7% range across the last several decades. I'm just wondering what was behind that compression?

Eddie, would you like to say something here?

Sure. When it comes to how we review cap rates — the IFRS values across the portfolio, that is — the approach is that a third party completes an appraisal. Typically, roughly one-third of the portfolio gets done each year. We had that completed, and management reviews as well, and we bring it all together into one holistic approach, correct? We're examining what acquisitions are doing in the markets, what we're seeing as we keep executing our strategy, and then what the third-party experts have to say. With all those data points, what we truly observed is that certain acquisitions completed in earlier periods experienced some cap rate compression. That comes from rising occupancy, the solid work we've done by adding amenities into the communities and repaving roads and those things. That work really assisted with the cap rates in some of the communities. Again, it's all validated through the third-party appraisal as well. We have industry experts performing these appraisals, and those are kind of the drivers that shifted the cap rate.

Thanks for that. Clearly, there's been a bit of discussion around seasonality and winter weather. How much did those factors play into the perhaps higher opex inflation we saw this quarter? Kurt, I believe you noted that January was affected too. I'm just wondering how you expect opex to trend in Q1 compared with the rest of the year?

That's a solid question. I mean, certainly in Q1 — so there's a bit of an impact in Q4 too, correct? As Kurt mentioned, we saw some of that in December. We had certain repairs and maintenance kind of work, the upkeep of the communities, plowing streets, and then some higher payroll as well. Look, frankly speaking, Q1 is going to have that too. We saw even more significant weather in January, with both the snow and the temperatures that caused some of the water sewer leaks. For Q1, I would definitely anticipate some seasonality and opex-related spending, but that should even itself out as we move through the rest of the year.

Thanks, that's the final one from me. You've mentioned before that deal flow can sometimes arrive pretty fast — say, when a family wants a quick exit. So I'm curious: has the set of acquisition opportunities shifted at all since our conversation last quarter?

No, we are still in discussions with people, obviously. The deals do look slightly lighter than usual, but conversations are happening. At this moment we are discussing several deals right now. With luck, we will have some announcements before long.