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UMH Properties Inc (NYSE:UMH)
Q2 2020 Earnings Call
Aug 6, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to UMH Properties' Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

It is now my pleasure to introduce your host, Ms. Nelli Madden, Director of Investor Relations. Thank you. Ms. Madden, you may begin.

Nelli Madden -- Director, Investor Relations

Thank you very much, operator. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited second quarter supplemental information presentation. The supplemental information presentation, along with our 10-Q, are available on the company's website at umh.reit.

I would like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company's second quarter 2020 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements.

In addition, during today's call, we will be discussing non-GAAP financial metrics. Reconciliations of these non-GAAP financial metrics to the comparable GAAP financial metrics as well as explanatory and cautionary language are included in our earnings release, our supplemental information and our historical SEC filings.

Having said that, I would like to introduce management with us today: Eugene Landy, Chairman; Samuel Landy, President and Chief Executive Officer; Anna Chew, Vice President and Chief Financial Officer; Brett Taft, Vice President and Chief Operating Officer; Jim Lykins, Vice President of Capital Markets; and Daniel Landy, Vice President.

It is now my pleasure to turn the call over to UMH's President and Chief Executive Officer, Samuel Landy.

Samuel A. Landy -- President and Chief Executive Officer

Thank you very much, Nelli. We are pleased to report our results for the second quarter ended June 30, 2020 and discuss the impact that the COVID-19 pandemic has had on our operations.

Although the pandemic has had a negative impact on many businesses and industries throughout the nation, we are pleased to report it has not materially impacted UMH's rent collections and occupancy.

Our rent collections are in line with pre-pandemic levels. Site and home rent for the quarter is now 98% collected. Rent collections remained consistent to pre-pandemic figures at 95% collections for the month of July this year and last.

The coming expiration of the unemployment benefits will be indicative of the true strength of our collections. Less than 100 residents have elected to enter into a payment agreement with us. Our residents recognize that we provide the highest-quality affordable housing in any market that we operate in.

Our communities are reporting strong demand. In fact, the migration of the population away from cities and out of apartments is further increasing demand at our locations. As a result, our occupancy rates continue to rise at a rapid pace. Same-store occupancy is now 85.8% and we have filled 550 sites year-over-year.

Despite delays caused by the pandemic, we are on-track to fill 750 to 800 rentals this year. We continue to complete capital improvements and expansions at our communities.

Moving on to our results for the second quarter. Normalized FFO was $0.17 per diluted share as compared to $0.14 in the prior year period and $0.15 in the first quarter of 2020. This represents an increase of 21% and 13%, respectively. Rental and related income for the quarter increased 12% over last year. Our operating expense ratio decreased from 47.7% in the second quarter of last year to 44% currently.

Our strong income growth, paired with the reduction in our operating expense ratio, resulted in NOI growth of 19% quarter-over-quarter. Our long-term business plan continues to drive earnings growth while generating increased property values.

Our same-property portfolio continues to perform exceptionally well. Our same-property occupancy rate improved 250 basis points to 85.8% from the same quarter last year. This translates to an increase of 550 revenue-producing sites year-over-year.

Same-property NOI increased 14% for both the second quarter and year-to-date. This is the third quarter in a row that we have delivered double-digit same-store NOI growth. These strong results are directly correlated to the success we have had at our value-added communities.

Our team has done an incredible job finding communities that were underperforming, identifying the problems and implementing a plan that creates improved community operating results. The results of this business plan are now being recognized in our financial statements. And increased property values will be realized by financing our free and clear communities and refinancing our encumbered properties.

The rental home program continues to perform very well. At quarter-end, we owned approximately 7,800 rentals. Year-to-date, we have added 367 rentals as compared to 336 last year. We remain on-track to add 750 to 800 rental homes to our portfolio this year. At quarter-end, our rental home occupancy was 95.2%.

Rental homes are the most efficient way to fill the vacant sites acquired through our turnaround acquisitions. Generally, we find that rental home tenants are reliable tenants that pay the rent on time and take good care of the home. Our team has done a great job installing and renting 800 new homes a year and turning over homes in a timely fashion. Rental homes in manufactured housing communities are the future of affordable housing.

Gross sales for the quarter were $5 million, representing a decrease of 14% over the same period last year. Our sales for the quarter were negatively impacted by the stay-at-home orders issued in March and the inability to show homes in person.

Given the difficult circumstances, we are satisfied with the performance of our sales operation. We believe that as business returns to normal throughout the remainder of the year, our results will improve. We have several expansions coming online in good sales markets that should drive improved sales results. Our sales centers are also reporting increased traffic and demand.

The development of our expansions continues to progress. We expect to complete the development of 191 sites this year. In addition, in the next 12 months, we expect to obtain approvals on approximately 900 sites. We should develop about 450 of these approved sites in the next 18 months. These newly developed sites will allow us to continue our sales and rental growth at communities that have consistently produced excellent results.

Subsequent to quarter-end, we closed on the acquisition of a 147-site community in Pennsylvania for a total purchase price of $3.3 million or $23,000 per site. This community was approximately 56% occupied at closing. It is in good condition and should perform well with the implementation of our sales and rental program.

We have one community in our pipeline which is expected to close during the third quarter. This community is located in New York and contains 163 sites, of which 69% are occupied. The purchase price is $4.5 million or $28,000 per site.

The acquisition market remains extremely competitive. The pandemic has proven the resiliency of the manufactured housing asset class. As a result, more investors continue to chase the same properties, further compressing cap rates.

Several properties and portfolios in our markets have closed and commanded going-in cap rates of 4% or less and prices of $50,000 a site or more. UMH excels at turnaround communities. We continue to seek properties that will enable us to implement our business plan and drive meaningful value creation.

We continue to make progress financing a portfolio of some of our free and clear communities with approximately $100 million of approximately 3% GSE mortgage debt. This would allow us to redeem $95 million of our 8% Series B preferred stock, generating additional FFO for common shareholders of approximately $0.11 per share annually.

UMH is also working with the GSEs to pioneer the recognition of rental manufactured homes in communities as rental housing that should be entitled to the same financing as traditional apartments. Further success in obtaining that recognition would allow us to finance approximately $310 million of rental homes that were purchased with preferred stock, reducing our cost of capital.

We are also working with a bank to obtain a line of credit on our rental homes that would allow us to tap into the rental equity on our balance sheet at rates close to prime.

As we refinance our capital stack and continue to improve our operating results, we have the potential to drive significant earnings growth throughout the rest of this year and into 2021. By executing on these items, we expect to make significant progress in reducing our payout ratio, which we anticipate will be below 100% in 2021.

I would like to take this opportunity to thank our dedicated UMH team for all their hard work. We have been laying the foundation for great results for many years. That foundation is so strong, we are able to report these excellent results despite the terrible tragedy of COVID.

And now, Anna will provide you with greater detail on our results for the quarter and for the year.

Anna T. Chew -- Vice President and Chief Financial Officer

Thank you, Sam. Normalized FFO, which excludes realized gains on the sale of securities and other nonrecurring items, was $7.1 million or $0.17 per diluted share for the second quarter of 2020 compared to $5.7 million or $0.14 per diluted share for the prior year period and $6.1 million or $0.15 sequentially.

As we continue to deploy the capital raised in the first quarter, we expect to continue to improve our FFO per share metrics. As we have already announced, we plan on calling our $95 million Series B perpetual preferred stock in October, generating savings of approximately 500 basis points or about $0.11 per share. Running this quarter's numbers with a new capital structure would result in FFO per share of $0.19 to $0.20.

Rental and related income for the quarter was $35.1 million compared to $31.4 million a year ago, representing an increase of 12%. Community NOI increased by 19% for the quarter from $16.4 million in 2019 to $19.6 million in 2020. These increases are attributable to our acquisitions, rent increases, the success of our rental home program and reduction of our operating expense ratio.

As Sam mentioned, our operating expense ratio improved from 47.7% for the second quarter of 2019 to 44% for the current quarter. For the six months, our expense ratio decreased from 48.5% to 44.6%. The reduction in our expense ratio is correlated to the reduction in expenses at our value-added acquisitions.

At quarter-end, our portfolio average monthly site rent increased by 2.5% to $454 over the same period last year. Our average monthly home rent increased by 3.1% to $777 over the same period last year. Same-property income for the second quarter increased 7.2% over the same period last year while expenses decreased by 1.3%, resulting in same-property NOI growth of 14.2%.

Sales of manufactured homes decreased 14% for the quarter from $5.8 million in 2019 to $5 million in 2020. We sold a total of 82 homes, of which 34 were new home sales and 48 were used home sales. We anticipate that sales will improve as the impact of the virus is reduced.

As we turn to our capital structure, at quarter-end, we had approximately $436 million in debt, of which $370 million was community-level mortgage debt and $66 million was loans payable. 85% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 4.14% at quarter-end compared to 4.29% in the prior year. The weighted average maturity on our mortgage debt was 5.5 years at quarter-end compared to 5.8 years a year ago.

At quarter-end, UMH had a total of $469 million in perpetual preferred equity. Our preferred stock, combined with an equity market capitalization of $534 million and our $436 million in debt, results in a total market capitalization of approximately $1.4 billion at quarter-end, representing an increase of 15% over the prior year period.

From a credit standpoint, our net debt to total market capitalization was 30%. Our net debt less securities to total market capitalization was 23%. Our net debt-to-adjusted EBITDA was 5.6 times. Our net debt less securities to adjusted EBITDA was 4.4 times. Our interest coverage was 4.2 times. And our fixed charge coverage was 1.5 times.

From a liquidity standpoint, we ended the quarter with $11 million in cash and cash equivalents, $60 million available on our unsecured credit facility with an additional $50 million potentially available pursuant to an accordion feature and $32 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory.

We also had $92 million in our REIT securities portfolio, encumbered by $33 million in margin loans. This portfolio represents approximately 7% of our undepreciated assets. We limit our portfolio to no more than 15% of our undepreciated assets.

With the exception of reinvesting our dividends in Monmouth Real Estate, we are committed to not increasing our investments in the REIT securities portfolio.

We continue to work on providing the company with additional financial flexibility. We have implemented both a $100 million common ATM program, and subsequent to quarter-end, a new $100 million preferred ATM program. The new preferred ATM program replaces our existing preferred ATM program, which raised net proceeds of $63.1 million during 2020 and $79.1 million since its adoption in October 2019. These programs will allow the company to opportunistically access the capital markets.

To-date, we have not sold any shares under the common ATM program or the new preferred ATM program. We have also amended and extended our revolving line of credit for the financing of homes, increasing total availability from $15 million to $20 million and reducing the interest rate by 25 basis points to prime with a floor of 3.25%.

As Sam mentioned, we continued to make progress on the financing of a portfolio of free and clear communities with fixed rate mortgage debt at rates of approximately 3%, generating proceeds of approximately $100 million. We are also in discussions with several lenders to create a credit facility utilizing our rental home as collateral with favorable pricing.

We plan to use these sources of capital to redeem our 8% Series B perpetual preferred stock, generating approximately $5 million of additional FFO or about $0.11 per share annually. These sources of capital will also allow us to continue to invest in our rental home program, capital improvements, expansions and additional acquisitions, further improving our operating results and the quality of our portfolio.

And now, let me turn it over to Gene before we open it up for questions.

Eugene W. Landy -- Chairman of the Board

The manufactured housing industry has performed incredibly well over the past few months. Many good industries were devastated by the impact that the shutdowns and stay-at-home orders have had on the economy.

Fortunately, for UMH, quality affordable housing is a necessity during any part of the economic cycle. Our communities are seeing increased demand, our occupancy rates are rising and our communities are in better condition than ever before.

This performance has given us the unique opportunity to obtain long-term debt at low rates to restructure our capital stack. By calling our 8% Series B preferred, we anticipate savings of $5 million or $0.11 per share annually. After the preferred call, UMH will have $374 million of preferred outstanding at a blended interest rate of 6.6%. All of this is callable by 2023.

If we can obtain capital through a combination of equity, debt or preferred at 4%, we can generate annual savings of approximately $10 million per year or $0.24 per share.

UMH has the potential to earn more than $1 per share in the next three years just by restructuring our capital stack. At the same time, we continue to grow the company through acquisitions, expansions and the infill of vacant sites. We have the potential to significantly increase earnings and ultimately our equity market capitalization.

Finally, in response to the pandemic, the United States has created vast amounts of money. The possibility of inflation is very real. A 50% leveraged real estate fund provides the investors a 300% gain on equity if asset values double. It requires 12 years for 6% inflation to double asset values. Our portfolio of communities is already substantially increasing in value because of the improvements we have made at our value-added acquisitions.

The combination of inflation, reduced interest rates, scale and improved operating results has the potential to substantial price appreciation for our company's shareholders.

We will now be happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]

Samuel A. Landy -- President and Chief Executive Officer

Okay. Our first question was submitted in writing due to the power failure from Rob Stevenson at Janney. And the first part of his question is, "Is the $0.11 earnings pickup you speak of in the earnings release predicated on swapping out the Series B preferreds for similar GSE debt at below 3%?"

And the answer to that is, yes. But I want to go over the importance of that refinancing and $0.11 earnings pickup.

Since we began the rental home program, we've been arguing that when the house and the lot have the same owner, they're entitled to the same financing as any apartments. And we've discussed that with the GSEs. We've discussed it with Dr. Ben Carson. And we have been pushing that issue for many years.

It looks to us like we've jumped that hurdle, and we're going to be able to obtain this GSE -- I'm sorry, yes, the GSE acceptance of the rental homes resulting in this lower-cost debt. It's the hugest development in manufactured housing.

Our product, the manufactured house, costs 40% less than stick-built homes, but our loan costed 40% more. We're going to reduce that cost of the loan to equivalent to apartments. And again, it's the biggest thing that's happened in the industry.

Along those lines, I just mentioned that we are the S in ESG, social. UMH comes into communities, upgrades communities, improves them and adds these rental homes, providing affordable housing. And this is being recognized by the government agencies, which is why we're going to obtain this debt.

The second part of Rob's question there was, "How much lower is that GSE debt price versus where you could finance other debt today?"

And I'll let Anna answer that.

Anna T. Chew -- Vice President and Chief Financial Officer

Sure. We have available loans availability. We have our line of credit -- our unsecured line of credit of $75 million, of which $60 million was available at quarter-end, and that was at 1.68%. We have our lines of credit for the financing of our notes receivable, and that was at prime, which is 3.25%.

What we also note is that all of our communities now qualify for GSE debt. So, we believe that any other debt or any other financings that we need will be -- go to the GSEs. And so, they will, therefore, be under 3%. Bank debt is a little bit higher but not by much, probably about 50 basis points.

Samuel A. Landy -- President and Chief Executive Officer

Okay. Good. Rob's second question was, "How are home sales trending in June and July? And has there been any significant disruption to the production supply chain or the financing in the market in general?"

And Brett, if you begin that, that would be great.

Brett Taft -- Chief Operating Officer

Yes. Sure. We really haven't seen too much of a disruption in the supply chain. We're able to get our homes in a timely manner. We've actually ordered more homes to this point this year than we did last year. So, that's not an issue.

I'll touch on June and July sales quickly. So, June sales were $2.3 million. That's actually an increase of 28% over June of last year. And July sales were $1.6 million, an increase of 26%. So even though sales for the year are down, we are seeing some positive improvements over the last few months.

The only other and probably the most major impact on sales is we have two sales centers that do a decent amount of volume in the land home business. Our land home operation was impacted because we haven't been able to get permitting and inspections to these sites. So, we've got several sales that we do expect to close on later this year that would have closed in the second quarter.

Samuel A. Landy -- President and Chief Executive Officer

Very good. And Rob's third question, "What does the acquisition pipeline look like behind this one you just did?"

And we'll go into that -- Brett will go into that in detail. But I want to point out, we've proven our business plan. I mean when we went out and talked to investors before COVID, the most common question was, how would we do in a downturn? And we always predicted we'd do as well as apartments. But as it appears in practice, what actually occurred is we did better. Because our product is so affordable, there may have been some doubling up, where people who couldn't afford other units came into our homes, people did not move, they stayed longer and other people came to our product.

We've had two of our Directors who are in the apartment area inspecting our communities the last couple of months. And they're incredibly impressed with the quality of the communities and the homes and what we've done through the turnaround process. And so, I think our next step is to take this national.

We -- as owners of a substantial part of the company, we've always been conservative and considered carefully what could happen if things went wrong. Well, COVID is about as wrong as things can go, and we did extremely well. And so, with this newfound confidence in how strong and consistent our revenue stream is, we need to go to other states, look for more acquisitions, more turnaround acquisitions and do them.

And we're very aware that to build a community takes a minimum of five years to make it successful, five years would be very quick. To do a turnaround property, takes three years. It's not one-year, it's not one-day, it's three years. But those turnaround properties are out there. They are profitable.

To the extent that doing turnarounds in the past has reduced FFO, we're going to strive not to reduce FFO. We're going to strive to do breakeven or better. But where you really make the money is increased value followed by, at the end of three years increased FFO. So that's the game plan, and we're braver and more aggressive than ever as a result of successfully surviving the COVID period.

And now we can take the next questions.

Operator

Thank you. Our next question comes from [Speech Overlap]

Samuel A. Landy -- President and Chief Executive Officer

I'm sorry, but Brett is going to get to the pipeline before we do that. Go ahead. Brett will add to the pipeline before we go --

Brett Taft -- Chief Operating Officer

Yes. So right now, we have one acquisition in our pipeline. It's in Fredonia, New York. It's 163 sites, 69% occupied, $4.5 million or $28,000 a site. We are through due diligence. That deal will move to closing. There's a loan assumption involved. And we expect that it will close sometime in probably September.

So, we also do have our eyes on several other acquisition opportunities in new states, which Sam is talking about. And hopefully, throughout the remainder of this year, we'll be able to get you better information on those.

Samuel A. Landy -- President and Chief Executive Officer

Thank you. And now, the next question.

Operator

Thank you. Our next question comes from Barry Oxford with D.A. Davidson. Please go ahead.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Thanks, guys. Sam, when you look at your shale region, you don't seem to have been affected by the depressed oil prices that happened during the quarter. And I know you don't have that much exposure to the oil and gas. But one might have thought you might not have weathered it as well as you did.

Samuel A. Landy -- President and Chief Executive Officer

So people should look at Marcellus Shale News. It comes out maybe weekly. Surprisingly, there is still new -- there are still new wells being drilled at this time. I was surprised by the number of new wells being drilled in Pennsylvania and Ohio at this time.

We are not reliant on the well drillers. But it's interesting that the well drilling continues. The pipeline projects continue, the cracker plants and the Panda plants. The -- nothing is bigger than the economic impact the Shell Cracker Plant and two other cracker plants being considered in Pennsylvania and Ohio that they're going to have, A, they employ something like 7,500 people a day building the Shell Cracker Plant. But the purpose of that plant is to convert natural gas into plastics. And it's just like when Pittsburgh was the steel capital and you wanted to locate near Pittsburgh to get steel, you are now going to want to locate near Pittsburgh and Ohio to get these plastic pellets to manufacture your products with low-cost plastics made right here in Ohio and Pittsburgh. So, this isn't built yet. It won't be complete till 2025. But people are already trying to locate near the cracker plant. And it's just an incredible development that will last for decades. On top of that, low-cost energy results in domestic manufacturing, which is why you have increased jobs, Indiana, Ohio, Tennessee, other places.

We are workforce housing. Our residents have turned out to be the essential workers who continued to work through the COVID crisis despite the personal health risks, etc. But they were the necessary workers who had to be out there working. And they went to work and got a paycheck and paid the rent.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Appreciate that color. Sam, switching gears a little bit. When you're talking about homes for sale and doing the financing, how has your underwriting changed? And also, the unemployment rate seems to be affecting a little more at the bottom half of the economy versus the upper half of the economy. How do you make sure that you're doing appropriate underwriting so that that mortgage gets paid?

Samuel A. Landy -- President and Chief Executive Officer

So first, again, we are that S in ESG, social. We've talked about internally why do we even sell homes anymore, you make money renting them? And the answer is it's better for the customer to own that house if they're staying three years. They experience substantial savings by owning that home and getting financed. And we've decided that even though we'd make more money renting the home, it's good for the customer, which is also good for us because it means that customer is going to be more satisfied, stay longer-term, tell their friends what a great house they have. And so, we will continue to sell houses as well as rent homes.

Our underwriting standards were changed in 2009, when restrictions were placed on who you finance. As incomes rise, more and more people qualified despite those changes, which helps our sales.

Additionally, UMH, recognizing that we've been financing home sales since 2001 and through whatever terrible economic times we've had, including COVID, the loan portfolio has always performed well with the loans being paid, no repossession losses. If we have to take back the house, we're able to fix it up quickly, winterize it, resell it or rent it and take no losses.

And therefore, we are pioneering a 5.99% financing on our sales, which is a lower rate than anybody else charges. And that results in additional sales. It results in additional people qualifying because the less income they need to qualify.

So, many of our renters, the reason we rent seven homes for every one we sell, either those people are staying less than three years, or despite having what we consider to be good credit, they don't qualify to buy the home. And what we consider to be good credit that doesn't qualify: divorce situation, foreclosed from a $300,000 house moving into a $70,000 house; recent business failure; or student loan debts that exceed the ratio, so you can't qualify. Those are all good customers who want to live in our houses but can't qualify, and we're happy to take them.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Thanks and appreciate it.

Operator

Our next question comes from Craig Kucera with B. Riley FBR. Please go ahead.

Craig Kucera -- B. Riley FBR -- Analyst

Hey, good morning, guys. I think last quarter, the expectation was that you were deferring rent increases for the second quarter. Did that play out? As we moved into third quarter, have you begun raising that again?

Samuel A. Landy -- President and Chief Executive Officer

Correct. All rent increase notices are being sent now. And any notices not sent, March, April, May, have now been sent out. So, there'll be a three-month lag for those communities. But they will get their rent increase.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. I think back in May, you had surveyed a number of your tenants. And you thought there might have been as much as 30% unemployment among kind of the folks that weren't retired. As we move kind of further along through the summer, kind of can you garner where that would be today?

Samuel A. Landy -- President and Chief Executive Officer

So first, that's a very anecdotal number coming from our managers. And everybody was kind of in a crisis picture and thought things were very terrible. And they'd hear people's bad news, that people lost their jobs, etc., and they estimated that to be 30%. But there's no science behind that.

Brett Taft -- Chief Operating Officer

And we've since resurveyed all of our managers. And again, it's just anecdotal evidence. But it's in the 5% to 10% range. Now, some properties are saying almost no impact, maybe one or two residents. And some properties are saying up to 10%. So, we feel much more confident about where that is now.

Craig Kucera -- B. Riley FBR -- Analyst

No, that's good news. I think I know the answer based on your commentary, Anna. But just looking at your same-store operating expense this quarter, it was down year-over-year. Was that just driven by the fact that some of those year-one acquisition expenses, where you're cleaning up the community, just did not occur this year?

Anna T. Chew -- Vice President and Chief Financial Officer

Absolutely. And also, some of the communities that we purchased two, three years ago, which are in the same-store pool, they no longer needed those year-one, year-two expenses. So, we were able to reduce our expense ratio quite well.

Samuel A. Landy -- President and Chief Executive Officer

Included in our really strong revenue growth is the fact that we reduced rents to communities that become separately metered for water and sewer and then charge them the water and sewer.

So, in the past quarter, there were communities that occurred with and in future quarters, there'll be communities that it occurs with. But again, it lowers our expense ratio, resulting in significant savings.

Additionally, there are communities where we do and are working on $1 million capital improvements to replace water or sewer lines, where you earn approximately 20% by reducing the leakage and infiltration.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. Just switching things up, your dividend income has been trending downward year-to-date, tough second quarter for a lot of retail names in the portfolio. What are your current thoughts on the portfolio going forward?

Eugene W. Landy -- Chairman of the Board

The portfolio has not performed well. But it's still approximately where it was at the beginning of the year. And we continue to hold it. And some of the stocks are doing fairly well. But where the REITs themselves may have suspended their dividends, we have the option of selling those shares and using part of that money to pay off preferred or reduce debt. So that even though the amount of dividends that you see go down, we have the option as long as the values of the stock stay up of, reducing our portfolio and reducing our interest cost.

So, the portfolio was not a large portion of our investments. Some of the stocks are very stable. We are able to borrow against it at sub-1%. I believe the portfolio is about $90 million, $92 million now. And we continue to watch it.

And certainly, REIT stocks today have fluctuate substantially. And I'm rather optimistic that we're able to reduce the portfolio in size so that we'll get fewer questions on the portfolio because it really isn't critical.

We got the -- we bought one of the portfolio for decades and it gave us a lot of flexibility. It allowed us to know that we had $100 million to use if we wanted to buy parks or $100 million to use if there was some other need for capital. And it's still there. We still have about $100 million to use if we want to. But in a company with 22,000 sites and over $1 billion in assets, the $100 million is not that significant.

So, the portfolio and the reduction in dividends, by the way, has reduced our earnings and our coverage for our dividend. But projections are so good that we're confident that we can increase earnings and cover the dividend.

Craig Kucera -- B. Riley FBR -- Analyst

Okay. Great. Just moving to the expansion side. I'd imagine it got quite a bit tougher to get those kind of approved. And through that process in the second quarter, a number of municipal offices were closed. Have things started to normalize here in the third quarter, which should allow you to kind of push some of those approvals ahead?

Samuel A. Landy -- President and Chief Executive Officer

Our Vice President, Jeff Yorick, does a tremendous job getting these approvals in place. And we're on-track to do the number of lots Brett referred to.

Brett Taft -- Chief Operating Officer

Yes. So, we were certainly delayed. And we're seeing now that we are getting some approvals. And that's why a lot of this year's approved -- expected approvals will push into next year. We expect to develop 191 sites this year. We expect to develop 450 next year. And in the next two years, starting now, we expect to have approvals on 1,100 sites.

Craig Kucera -- B. Riley FBR -- Analyst

Okay. Anna, I have a question about the credit facility [Speech Overlap] -- I'm sorry.

Eugene W. Landy -- Chairman of the Board

If I can add to that, UMH participated in a lecture series sponsored by the Manufactured Housing Institute. And the projection was that the manufactured housing industry can significantly assist in solving the affordable housing crisis. And the goal for the entire industry should be an additional 100,000 homes a year, which would be 500, 200-space communities being built every year for a decade.

So, we need at least 1 million more units. And UMH will continue to push for the approval process being made more reasonable. We haven't built enough parks in the last 20 years. In fact, we've built almost none, whereas the decades before, we used to build 100,000 units a year, 100,000 sites a year. So, in a political atmosphere, we see that both political parties also have as a goal that the affordable housing be built. And both political parties are looking into how we can get more approvals for more manufactured housing sites because we desperately need the housing.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. Anna, I wanted to circle back with you on some of the new debt products that you're working with on the GSEs and some of your banks. I guess, first, when you're looking at a credit facility using rental homes as collateral, can you kind of talk about the loan-to-value that a bank is willing to look at? Is that pretty similar to an apartment? Or just any color there would be great.

Anna T. Chew -- Vice President and Chief Financial Officer

Right now, because it will be a new product, they're looking at about a 60% LTV. So for us, that sounds great, especially starting out. They have never had this program before. So, this is a new program they will have that they will have with UMH. And they want to take it, of course, to other companies too.

Craig Kucera -- B. Riley FBR -- Analyst

Okay. That was my next question. Just thinking about the GSE debt that you're looking to price here at about 3%, do you think they're going to roll that out across the industry? Or are they going to kind of have a little bit more stringent underwriting to whom they're willing to offer that to?

Anna T. Chew -- Vice President and Chief Financial Officer

They're pretty stringent on what they're doing right now. They know us. We've had a lot of transactions with the GSEs. Right now, they have not rolled it out to anybody else. In the future, they want to make this the -- I guess they want to keep this as a model and then take a look and see what else they can do with other companies.

Samuel A. Landy -- President and Chief Executive Officer

It goes back to our whole argument that we have the opportunity to create horizontal apartments, 1,000-square foot, three-bedroom, two-bath homes on 50x100 lots, nobody living above you, below you. You don't get an elevator with anybody else. You park your car in your driveway at your lot. You walk into your rental dwelling unit, which is more affordable than anything else in the local area that you are.

If more people get approvals to build these and can get this financing we're talking about, it will greatly expand the amount of affordable housing in this country. Fannie Mae, Freddie Mac, HUD, they all recognize that. When that occurs and there's additional product, UMH, like other REITs, will have more properties to acquire, which is very good for us.

Craig Kucera -- B. Riley FBR -- Analyst

Okay, great. That's it from me. Thank you.

Operator

[Operator Instructions] Our next question comes from Merrill Ross with Compass Point. Please go ahead.

Merrill Ross -- Compass Point -- Analyst

Thank you. Good morning. At some point during your comments, you mentioned that there's $310 million of assets purchased with preferred stock that could be refinanced with GSE debt. Would that be subject to the call dates on the preferred?

Samuel A. Landy -- President and Chief Executive Officer

Yes, exactly. The redemption dates, yes, we would -- we redeem each issue of preferred at the time it comes due with the new lower-cost debt.

Merrill Ross -- Compass Point -- Analyst

Good. I'd look up those dates. The other question is sort of more interesting. Going national, what's at the top of the list?

Samuel A. Landy -- President and Chief Executive Officer

Well, it's really more based on availability. What we know is the formula, right, of what works. We know what we're looking for. So, we just have to find it. And it wouldn't matter what state it's in, right? We've decided we want to do this nationally. So, it's the question of the numbers working and the property meeting our criteria. So wherever that occurs, we would go.

Merrill Ross -- Compass Point -- Analyst

Yes. That makes sense. I mean the Smile States would seem to be appealing, a higher rental population and no winterization.

Samuel A. Landy -- President and Chief Executive Officer

Yes. We'll do it anywhere it works. And it's workforce housing, where are the demographic trends going, where are more people coming, where does everybody acknowledge there's a shortage of affordable housing, where are there communities that have been neglected, and especially if they have land adjoining the community, so they could be expanded. That's what we're looking for.

Merrill Ross -- Compass Point -- Analyst

All right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

Samuel A. Landy -- President and Chief Executive Officer

Thank you, operator. I would like to thank the participants on this call for their continued support and interest in our company. As always, Gene, Anna, Brett and I are available for any follow-up questions.

We look forward to reporting back to you in November with our third quarter 2020 results. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. A teleconference replay will be available in approximately one hour. To access this replay, please dial U.S. toll-free 1-877-344-7529 or international 1-412-317-0088. The conference ID number is 10145442. Thank you, and please disconnect your line.

Duration: 50 minutes

Call participants:

Nelli Madden -- Director, Investor Relations

Samuel A. Landy -- President and Chief Executive Officer

Anna T. Chew -- Vice President and Chief Financial Officer

Eugene W. Landy -- Chairman of the Board

Brett Taft -- Chief Operating Officer

Barry Oxford -- D.A. Davidson -- Analyst

Craig Kucera -- B. Riley FBR -- Analyst

Merrill Ross -- Compass Point -- Analyst

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