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

Good day, everyone, and thank you for joining us. You're listening to the Flagship Communities REIT call covering second quarter 2026 results. Right now, everyone is in listen-only mode. After the presentation, analysts and institutional investors will have a short question-and-answer period. I'd like to remind all of you that this call is being recorded. Kurt Keeney, Flagship's President and Chief Executive Officer, is with us today, along with Nathan Smith, Chief Investment Officer, and Eddie Carlisle, Chief Financial Officer. Be aware that remarks on this call could include forward-looking information, which by nature carries risks and uncertainties. Results actually achieved could differ materially from today's stated views. To learn more about those risks and uncertainties, please see the company's applicable filings on SEDAR+. You can also find these documents on Flagship's website, flagshipcommunities.com. Flagship has prepared a PowerPoint presentation to accompany this call as well, and it encourages you to follow along. I'll now hand things to Kurt Keeney. Kurt?

Thanks, Operator. Morning, everyone, and thanks for being with us today. Flagship turned in yet another solid quarter on both the operating and financial fronts, powered by ongoing strength in our core business and the MHC industry. During the second quarter, we saw occupancy rise overall and same-community occupancy climb as well, along with gains in our same-community financial metrics. Improvements like these reflect just how strong demand is for affordable housing and how solid the MHC sector is overall. Across nearly 6 years as a public REIT and more than 30 years in the MHC space, we've demonstrated that we can perform well no matter what the economic environment looks like. Growth comes from organic initiatives as well as disciplined expansion within our core markets. This quarter we closed one strategic acquisition, and Nathan will touch on that shortly. That said, our results owed a great deal to continued progress in the underlying business, which is how we expect to create value for unitholders. We posted several notable gains across many key metrics, among them rental revenue, up 21.4% versus the same period a year ago; NOI, which rose 18.9% over last year; and FFO adjusted and AFFO adjusted, up 10.2% and 8.3% respectively compared with last year.

Same-community metrics also kept showing robust expansion throughout the quarter. Revenue on a same-community basis rose 9% versus the prior year, while same-community NOI climbed 6.3% across that identical span. Occupancy within our same communities came in at 85.4%, up 2% compared with the close of last year — a signal we read as highly encouraging regarding the MHC sector's health and steadiness. Across more than 20 years, the MHC sector has expanded roughly 4% annually, beating every other real estate category. Slide 6 of this presentation shows that NOI growth stayed positive through the housing crisis and Great Recession, and in more recent times held up resiliently during the pandemic. In the current climate, traditional housing and condo market home sales have fallen, driven largely by escalating prices, tighter credit, elevated mortgage rates, and broad economic uncertainty. By contrast, we have produced steady, recurring rental income streams, chiefly thanks to our sizable and varied resident base. We continually seek ways to enhance the resident experience across our communities, and recognition from our industry always delights us. During the quarter just passed, the Kentucky Manufactured Housing Institute honored us with the 2025 Community of the Year award for Sawyer Point, our community in Georgetown, Kentucky.

For the fifth year in a row, Flagship has earned KMHI's Community of the Year award, and Sawyer Point shows how fresh amenities plus community programming can produce outstanding living conditions for the people who live there. It also speaks to our incredible team, who consistently place residents first and make safe, amenity-rich, lively communities a priority throughout our portfolio. At this point I'll hand things over to Nathan for his comments. Nathan?

Thanks, Kurt. Good morning, everyone. I've long believed that strong performance starts at the community level, and that's a major reason we delivered another excellent quarter. To put it simply, when we put money into the resident experience, residents are more inclined to remain in our communities. We take pride in our ongoing emphasis on upgrading infrastructure and community engagement initiatives, all of which help foster a positive experience and keep our residents retained over the long term. Beyond that community-level focus, we keep pursuing strategic acquisitions situated in key markets where we operate. During the past quarter, we grew our presence in Northern Ohio through a strategic acquisition of an MHC that we expect will be immediately accretive to our AFFO. This 28-lot MHC sits in Marblehead, Ohio, and is fully occupied. It features a private beach area and a fishing pier, plus a number of boat slips. That's yet another illustration of our bolt-on acquisition strategy. This MHC is close to another Flagship-owned community in Northern Ohio, and lets us keep generating operational efficiencies by managing nearby properties together. We remain disciplined in our approach to acquisitions while concentrating on strong organic growth and delivering value for our unitholders.

Having said that, I'll hand things over to Eddie, who will walk us through the financial results for the quarter. Eddie?

Thanks, Nathan, and good morning to everyone. In the second quarter, we kept producing solid financial results from our organic portfolio while keeping the balance sheet strong and stable. Revenue rose 21.4% for the quarter versus the same period a year earlier, driven by acquisitions and by lot rent increases throughout the portfolio. Same-community revenue came to $27.3 million in the second quarter, up roughly 9% from the comparable period last year. That gain came from higher monthly lot rents and ancillary revenues, along with an increase in same-community occupancy. Net operating income and NOI margin were $19.8 million and 65.1%, respectively, versus $16.7 million and 66.6% in the same period last year. Same-community NOI margin was 64.9% in the second quarter, down 1.7% from last year. Although NOI benefited from an increase in amenity fees, NOI margins took a negative hit because those services carry a lower margin than we have historically achieved. Seasonal weather effects in the quarter also weighed significantly on cost and reduced margins. FFO adjusted and FFO adjusted per unit were $9.9 million and 38.9 cents, respectively, for the quarter, up 10.2% and 9%, respectively, from last year.

For the quarter, AFFO adjusted came in at $8.9 million, and AFFO adjusted per unit was 34.9 cents — that's an 8.3% and 7.1% increase respectively versus last year. Same-community occupancy reached 85.4%, up 2% from the end of last year, which, as Nathan mentioned earlier, continues to reflect the focus we place on residents at the individual level. Rent collections during the quarter hit 99%, which shows the strength and consistency of the MHC sector. As of June 30, total lot occupancy stood at 84.7%, also up relative to the end of last year, and average monthly lot rent came to $516. We stay focused on keeping a strong and conservative balance sheet, with emphasis on long-dated fixed-rate debt. In the second quarter, we raised the total capacity of our revolving line of credit to $33 million, extended its term to 3 years, and eliminated the 1/2% spread. In early July, we drew $6 million as a supplemental borrowing under an existing $10.7 million mortgage. The interest rate was amended to 5.39%, which works out to a blended rate of 4.98% under the existing mortgage and 6.12% for the supplemental borrowing, with the maturity date unchanged. Our weighted average mortgage interest rate was 4.54%, and our weighted average mortgage term to maturity was 7.7 years.

There's nothing meaningful coming due on our debt until 2030. Our total liquidity stood at $25.8 million. As of June 30, 2026, the REIT holds 18 unencumbered investment properties, with an aggregate fair value of $103 million. So with that, I'll hand things back to Kurt for a few closing comments. Kurt?

Thank you, Eddie. With a robust first six months of 2026 behind us, we're set up nicely for another strong year. Our confidence in the business outlook and in the MHC industry hasn't wavered, since rising home prices, elevated monthly rents charged by multifamily competitors, and climbing mortgage rates could all push more people toward manufactured housing, given that our homes stay affordable. As we look toward the year's second half, our priorities haven't changed. We plan to sustain organic growth through continued investment in the resident experience and by getting the most out of operational efficiencies. We'll pursue this from a place of financial strength, with a conservative balance sheet and no meaningful debt maturities before 2030. All of this reflects the strength and quality of our residents as well as the predictability and consistency of the MHC sector. We truly appreciate your time today, and I'll now open the line for questions.

Thank you. If you'd like to ask a question, press *11 on your phone and then wait until your name is called. Should you need to withdraw that question, just press *11 once more. Please hold while we put together the Q&A roster. Our first question is from Mark Rothschild at Canaccord. Your line is open now.

Appreciate it, and morning to all of you.

Good morning there, Mark.

Hey, could you say a bit about the acquisition environment? Things have been fairly slow and quiet. Are you seeing opportunities? Is it just that people are quieter in the summer? Is it that pricing isn't where you're comfortable with? How do you see that picking up over the rest of the year?

Mark, we've completed two deals this year so far, and we've examined plenty of opportunities. We haven't observed cap rates widening — in fact, in quite a few markets around the country, they've actually compressed. Only a handful of the transactions we pursued or had interest in have actually closed. We're still searching, and we'll remain tightly concentrated on our own region. At the moment, we have no appetite for anything outside our area. The search goes on. I've reviewed a great number of deals. A lot of them simply haven't changed hands.

Thank you. Perhaps just one more question. I've noticed your team has become somewhat more engaged in purchasing houses outright to lease them on land you own. I understand that's fairly unusual for particular assets, but what's your take on this initiative? I recall it wasn't something that appealed to you much a few years back. Does it represent a bigger opportunity now — something you might apply at other properties to make use of surplus land?

Yes. Hi, Mark. During the first six months of this year, we added 224 rental homes to the fleet. We don't really expect to keep that pace going. Last year we acquired some really good locations, and 53% of our locations are hitting all-time occupancy highs. At times, when you reach the final portion of the community — right, when you're down to the last lot, that final 5% — a rental home may be needed to make some vacant lots economically viable. With new acquisitions, you might need a rental home to help alter the curb appeal, perhaps, if you're purchasing a value-add property. I don't anticipate us being that heavy-handed. We did sell 39 of them. I expect we'll keep selling off the older units. This isn't a strategy change for us at all. It's just that I've always described it as a blunt tool in the shed. It is a tool, and we will use it while trying to keep it to a minimum. We remain a homeownership model. I believe 88% of our customers are still homeowners. We have 500-lot communities with no rental homes. We believe that's a good strategy.

Excellent. I really appreciate it.

Thanks. Jonathan Kelcher from TD Cowen has the next question, and your line is open now.

Thank you. And a good morning to everyone.

Good morning.

Regarding the same-property NOI margin, Eddie, I believe you mentioned possibly some effects from seasonal weather, and also that you have additional amenities putting a bit of pressure on it. Could you perhaps quantify how large that difference is?

Yes. Q1 was effectively a tough quarter, and we discussed it at considerable length back then. Certain of those issues actually carried over into Q2, particularly regarding water sewer recapture and water leaks. When you compare year over year, our water sewer recapture last year ranged from 95% to 97%. During the first 5 months of this year — 4 and a half months of this year — we sat below 90%. That genuinely squeezes the margins. That's a significant figure. The end of May and into the month of June marked the first month in which we had climbed back above that 90% threshold. That accounts for a substantial share of what is driving it. Regarding margins on the ancillary revenue, the cable agreements, those items, yes, it's a fairly thin margin business, yet a somewhat large amount of revenue. It certainly does place some pressure on the margins there. If you remove those two items, we're back above that 65%, 65.5% margins, which is roughly where I would anticipate us trending going forward. The impact of that water sewer was the biggest driver of it in Q2.

Alright. If Q3 has no weather impacts, then margins would probably be down by about 50 bps, right?

My impression is that this is right.

All right. And then, second point — possibly a bit soon to ask, but what's the right way for us to think about batch increases come January 1st?

You're correct — it's a bit early to be having that discussion. In the past, our guidance has consistently been 4% to 5%, somewhere in that vicinity. That remains the range we're in. Across our Midwest markets, what we observe are quite steady economic conditions. For competing products — chiefly apartments — rents continue rising 5% each year. A substantial gap still exists, typically $300 to $500, and often larger, separating us from apartment rents on an all-in basis when you own a home. My sense is we're within that same broad range. Honestly, this is an unusually stable period. Nothing I can see would push us outside our guidance.

That is useful. I'll hand it back to you. Thanks.

Thanks, Jonathan. Appreciate it.

Kyle Stanley from Desjardins has our next question. Your line is open.

Appreciate it. Good morning, everyone.

Kyle, good morning.

Good morning, everyone.

Turning to occupancy, you've clearly gotten off to a very solid start this year, I'd say. Some of that, of course, appears to have been linked to a robust home sales season, something you've referenced before. So how do you feel about additional occupancy gains over the rest of the year, perhaps as the home sales season begins to ease somewhat on a seasonal basis?

From a seasonality standpoint for this business, I'd say things look great. Finishing the second quarter with a 2% year-over-year increase puts you in a good position. That's especially true as you move toward the fourth quarter, since with the holiday schedule you simply don't shift occupancy much during that period. If we're able to keep the occupancy gains we've made through the remainder of the year, I'll be quite happy with that. As I've said, our guidance has consistently been 1% to 2% same-community occupancy gains year-over-year. My sense is we'll land right in that range, likely nearer the top of it as we continue forward. Once again, demand isn't an issue. It's simply a bit of cyclicality that comes as you enter the fourth quarter with the holiday schedule.

Got it. That’s logical. At this stage, probably the goal is more or less to preserve the gains. Okay. Yeah.