MHC.UN Flagship Communities Real Estate Investment Trust

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TORONTO, May 9, 2023 /CNW/ - Flagship Communities Real Estate Investment Trust ("Flagship" or the "REIT") (TSX: MHC.U) (TSX: MHC.UN) today released its first quarter 2023 results. The financial results of the REIT are presented below in accordance with International Financial Reporting Standards ("IFRS"), except where otherwise noted. Results are shown in U.S. dollars unless otherwise noted.

First Quarter 2023 Results:

• Rental revenue for the three months ended March 31, 2023 was $16.8 million, an increase of 22.4% compared to $13.7 million for the three months ended March 31, 2022
• Same Community Revenue¹ for the three months ended March 31, 2023 was $14.9 million, up 9.7% compared to $13.5 million for the three months ended March 31, 2022
• Net income and comprehensive income for the three months ended March 31, 2023 was $16.2 million compared to $2.4 million for the three months ended March 31, 2022
• Adjusted Funds From Operations ("AFFO") per unit (diluted)² for the three months ended March 31, 2023 was $0.260, an increase of 4.8% compared to $0.248 for the three months ended March 31, 2022
• Net Operating Income ("NOI") for the three months ended March 31, 2023 was $11.1 million, up 20.1% compared to $9.3 million for the three months ended March 31, 2022
• Same Community NOI¹ for the three months ended March 31, 2023 was $9.8 million, an increase of 6.3%, compared to $9.2 million for the three months ended March 31, 2022
• NOI Margin¹ for the three months ended March 31, 2023 was 66.3% compared to 67.6% for the three months ended March 31, 2022
• Same Community NOI Margin¹ for the three months ended March 31, 2023 was 65.9% compared to 68.1% for the three months ended March 31, 2022
• Debt to Gross Book Value¹ as at March 31, 2023 was 40.0% compared to 42.9% as at December 31, 2022
• Total portfolio occupancy was 83.4% as at March 31, 2023, no change compared to December 31, 2022
• Same Community¹ occupancy increased to 84.0% as at March 31, 2023, an increase of 1.1% compared to 82.9% as at March 31, 2022, demonstrating the REITs ability to drive occupancy growth utilizing the home ownership model
• Rent Collections¹ for the three months ended March 31, 2023 was 99.7%, up from 99.0% for the three months ended March 31, 2022
• During the first quarter 2023, Flagship raised gross proceeds of $20 million through the issuance of 1,176,471 Units at a price of $17.00 per Unit pursuant to the at-the-market Offering ("ATM") announced in May 2022. The net proceeds from the exercise of the ATM Issuance will be used by the REIT to fund future acquisitions and for general business purposes
• Acquired a 20-acre, high-quality MHC in Austin, Indiana that included 94 developed lots and 26 lots for additional expansion, totaling 120 MHC homesites for approximately $2.0 million by the issuance of 120,598 Class B units by Flagship Operating, LLC, a subsidiary of the REIT from a related party, Empower Park, LLC
• Subsequent to quarter-end, acquired three Manufactured Housing Communities ("MHC") in Indiana, Arkansas and Tennessee, for a purchase price of approximately US$21 million
• Received three of the Manufactured Housing Institute's highest national awards for excellence in manufactured housing including: Land Lease Community Operator of the Year, Retail Sales Center of the Year for the Eastern U.S. and Community Impact of the Year for efforts associated with Grandin Pointe
• Published third annual Environmental, Social and Governance ("ESG") report, which outlines Flagship's commitments to its unitholders, employees, and communities through initiatives on renewable energy, education, household amenities, and resident well-being

"The positive momentum that we generated in 2022 has carried into the first quarter of 2023, which saw notable increases in both rental revenue and Same Community revenue relative to the same period last year," said Kurt Keeney, President and CEO. "Our strong operating and financial results speak to the strength of our organic portfolio and the Manufactured Housing Industry, which remains a desirable and cost-effective home ownership option for many Americans. We also continue to see acquisition opportunities in the MHC space, having made a high-quality acquisition in Indiana and recently acquiring three MHCs in core states, where we already have an existing presence."

Financial Summary

Financial Overview

Rental revenue and related income in the first quarter of 2023 was $16.8 million, up 22.4% compared to the same period last year primarily due to Acquisitions, lot rent increases and occupancy increases across the portfolio.

Same Community Revenues of $14.9 million for the first quarter ended March 31, 2023, exceeded the first quarter ended March 31, 2022 by approximately $1.3 million or 9.7%. This increase was driven by increasing monthly lot rent year over year as well as growth in Same Community Occupancy and increases in utility revenue.

Net income and comprehensive income for the three months ended March 31, 2023 was $16.2 million, approximately $13.8 million more than the same period last year, as a result of the fair value gain on investment property being more than in the same period in 2022.

NOI for the first quarter of 2023 was $11.1 million, compared to $9.3 million, an increase of 20.1% compared to the first quarter of 2022.

The increase in NOI was primarily driven by the REIT's Acquisitions, lot rent growth and cost containment efforts.

NOI Margins and Same Community NOI Margins decreased over the same period due to property tax increases, staffing changes and increased repairs and maintenance pertaining to weather-related events.

Same Community occupancy of 84.0% increased by 1.1% as of March 31, 2023, compared to the same period last year. The consistent and growing occupancy rate reflects Flagship's commitment to resident satisfaction and ensuring its communities are desirable locations.

AFFO for the first quarter of 2023 was $5.2 million, an increase of 6.1% from the first quarter of 2022. AFFO per Unit for the first quarter of 2023 was $0.260 per unit, an increase of 4.8% from $0.248 from the same period last year.

Rent Collections for the first quarter of 2023 were 99.7%, an increase from 99.0% from the three months ended March 31, 2022.

During the first quarter 2023, Flagship raised gross proceeds of $20 million through the issuance of 1,176,471 Units at a price of $17.00 per Unit pursuant to the at-the-market Offering ("ATM") announced in May 2022. The net proceeds from the exercise of the ATM Issuance will be used by the REIT to fund future acquisitions and for general business purposes.

As of March 31, 2023, Flagship's total cash and cash equivalents were $24.9 million with no near-term debt obligations. The REIT's Weighted Average Mortgage Term (see "Other Real Estate Industry Metrics" for more information) to maturity was 11.4 years, with no balloon payments due in the next 12 months.

Operations Overview

During the first quarter 2023, Flagship agreed to acquire a 20-acre, high-quality MHC in Austin, Indiana that includes 94 developed lots and 26 lots for additional expansion, totaling 120 MHC homesites for approximately $2.0 million by the issuance of 120,598 Class B units by Flagship Operating, LLC, a subsidiary of the REIT from a related party, Empower Park, LLC.

Located just 35 miles from the Louisville, Kentucky metro area, the city of Austin offers affordable housing in Scott County, Indiana, and includes an array of amenities including a new clubhouse, playground, basketball courts and soccer fields. Scott County is in the automotive supply chain network with the Honda manufacturing plant located in Greensburg, Indiana and is within 35 minutes of downtown Louisville, Kentucky as well as also being on the I-65 corridor that connects Louisville to Indianapolis, Indiana.

As a testament to the REIT's mission of bringing high quality, affordable communities to market, coupled with the dedication of its team, Flagship was the recent recipient of three of the Manufactured Housing Institute's highest national awards for excellence in manufactured housing. These awards include: Land Lease Community Operator of the Year, Retail Sales Center of the Year for the Eastern U.S. and Community Impact of the Year for efforts associated with Grandin Pointe.

Flagship also recently published its third ESG Report (the "Report"), which is available on its website at https://flagshipcommunities.com/investor-relations/sustainability-report/. The Report highlights Flagship's commitments to its unitholders, employees, and communities through initiatives on renewable energy, education, household amenities, and resident well-being. The Report also includes details on Flagship's water conservation and renewable energy solar programs, its diversified staff and Board of Trustees, as well as its corporate governance structure.

As at March 31, 2023, the REIT owned a 100% interest in a portfolio of 68 MHCs with 12,273 lots as well as two RV resort communities with 470 sites. The table below provides a summary of the REIT's portfolio as of March 31, 2023, compared to March 31, 2022:

Subsequent to quarter-end, Flagship acquired three communities in Indiana, Arkansas and Tennessee for a purchase price of approximately US$21 million. The purchase price of US$21 million will be funded with cash on the REIT's balance sheet, including from capital raised by the REIT's ATM equity program.

Outlook

Flagship believes the REIT is well positioned amidst the current inflationary economic environment, higher rental rates and rising mortgage rates that are making traditional, stick-built homes more difficult to obtain in the United States.

Flagship maintains a positive outlook for the MHC industry and believes it offers significant upside potential to investors. This is primarily due to the MHC industry's consistent track record of historical outperformance relative to other real estate classes and the lack of supply of new manufactured housing communities given the various layers of regulatory restrictions, competing land uses and scarcity of land zoned, which has created high barriers to entry for new market entrants.  

Other macro and MHC industry-specific characteristics and trends that support Flagship's positive outlook include:

• Increasing household formations;
• Lower housing and rental affordability;
• Declining single-family residential homeownership rates;

Non-IFRS Financial Measures

In this news release, The REIT uses certain financial measures that are not defined under International Financial Reporting Standards ("IFRS") including certain non-IFRS ratios, to measure, compare and explain the operating results, financial performance and cash flows of the REIT. These measures are commonly used by entities in the real estate industry as useful metrics for measuring performance. However, they do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other publicly traded entities. These measures should be considered as supplemental in nature and not as a substitute for related financial information prepared in accordance with IFRS.

Funds from Operations and Adjusted Funds from Operations

Funds from operations ("FFO") and adjusted funds from operations ("AFFO") are calculated in accordance with the definition provided by the Real Property Association of Canada ("REALPAC").

FFO is defined as IFRS consolidated net income (loss) adjusted for items such as distributions on redeemable or exchangeable units recorded as finance cost under IFRS (including distributions on the Class B Units), unrealized fair value adjustments to investment properties, loss on extinguishment of acquired mortgages payable, gain on disposition of investment properties, and depreciation. FFO should not be construed as an alternative to consolidated net income (loss) or consolidated cash flows provided by or (used in) operating activities determined in accordance with IFRS. The REIT's method of calculating FFO is substantially in accordance with REALPAC's recommendations but may differ from other issuers' methods and, accordingly, may not be comparable to FFO reported by other issuers.

Refer to section "Reconciliation of FFO, FFO per Unit, AFFO and AFFO per Unit" for a reconciliation of FFO to AFFO to consolidated net income (loss).

"FFO per Unit (diluted)" is defined as FFO for the applicable period divided by the diluted weighted average Unit count (including Class B Units, vested RUs and vested DTUs) during the period.

AFFO is defined as FFO adjusted for items such as maintenance capital expenditures, and certain non-cash items such as amortization of intangible assets, and premiums and discounts on debt and investments. AFFO should not be construed as an alternative to consolidated net income (loss) or consolidated cash flows provided by (used in) operating activities determined in accordance with IFRS.  The REIT's method of calculating AFFO is substantially in accordance with REALPAC's recommendations. The REIT uses a capital expenditure reserve of $60 per lot per year and $1,000 per rental home pear year in the AFFO calculation. This reserve is based on management's best estimate of the cost that the REIT may incur, related to maintaining the investment properties. This may differ from other issuers' methods and, accordingly, may not be comparable to AFFO reported by other issuers. Refer to section "Reconciliation of FFO, FFO per Unit, AFFO and AFFO per Unit" for a reconciliation of AFFO to consolidated net income (loss).

"AFFO Payout Ratio" is defined as total cash distributions of the REIT (including distributions on Class B Units) divided by AFFO. "AFFO per Unit (diluted)" is defined as AFFO for the applicable period divided by the diluted weighted average Unit count (including Class B Units, vested RUs and vested DTUs) during the period. 

The REIT believes these non-IFRS financial measures and ratios provide useful supplemental information to both management and investors in measuring the operating performance, financial performance and financial condition of the REIT. The REIT also uses AFFO in assessing its distribution paying capacity.

Other Real Estate Industry Metrics

Additionally, this news release contains several other real estate industry metrics that are not disclosed in the REIT's financial statements:

• "Acquisitions" means the REIT's properties, excluding Same Communities (as defined below) and such measures (i.e.: Revenue, Acquisitions; NOI, Acquisitions; and NOI Margin, Acquisitions) are used by management to evaluate period-over-period performance of such investment properties throughout both respective periods. These results reflect the impact of acquisitions of investment properties.
• "NOI margin" is defined as NOI divided by total revenue. Refer to section "Calculation of Other Real Estate Industry Metrics – NOI and NOI Margin".
• "Rent Collections" is defined as the total cash collected in a period divided by total revenue charged in that same period.
• "Same Community" means all properties which have been owned and operated continuously since January 1, 2021, by the REIT and such measures (i.e.: Same Community Revenue or Revenue, Same Community; Same Community NOI or NOI, Same Community; NOI Margin, Same Community; and Same Community occupancy) are used by management to evaluate period-over-period.
• "Weighted Average Lot Rent" means the lot rent for each individual community multiplied by the total lots in that community summed for all communities divided by the total number of lots for all communities
• "Weighted Average Mortgage Term" is calculated by multiplying each mortgage's remaining term by the mortgage balance and dividing by the sum by the total mortgage balance.

Reconciliation of Non-IFRS Financial Measures

FFO, FFO Per Unit, AFFO and AFFO per Unit

Calculation of Other Real Estate Industry Metrics

NOI and NOI Margin

Forward-Looking Statements

This news release contains statements that include forward-looking information (within the meaning of applicable Canadian securities laws). Forward-looking statements are identified by words such as "believe", "anticipate", "project", "expect", "intend", "plan", "will", "may", "can", "could", "would", "must", "estimate", "target", "objective", and other similar expressions, or negative versions thereof, and include statements herein concerning: the REIT's investment strategy and creation of long-term value; the REIT's intention to continue to expand, including on a clustered basis and newly-entered geographies, and to convert rental homes to tenant owned homes as opportunities allow; expected sources of funding for future acquisitions; macro characteristics and trends in the United States real estate and housing industry, as well as the manufactured housing community ("MHC") industry specifically; the continued ability of the REIT's MHCs to be stable or strengthen in the foreseeable future and over the longer term; and the REIT's target indebtedness as a percentage of Gross Book Value. These statements are based on the REIT's expectations, estimates, forecasts, and projections, as well as assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies that could cause actual results to differ materially from those that are disclosed in such forward-looking statements. While considered reasonable by management of the REIT as at the date of this news release, any of these expectations, estimates, forecasts, projections, or assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those expectations, estimates, forecasts, projections, or assumptions could be incorrect. Material factors and assumptions used by management of the REIT to develop the forward-looking information in this news release include, but are not limited to, the REIT's current expectations about: vacancy and rental growth rates in MHCs and the continued receipt of rental payments in line with historical collections; demographic trends in areas where the MHCs are located; further MHC acquisitions by the REIT; the applicability of any government regulation concerning MHCs and other residential accommodations; the availability of debt financing and future interest rates, which continue to be volatile and have trended upward since the REIT'S formation in 2020; increasing expenditures and fees, in connection with the ownership of MHCs, driven by inflation; and tax laws. When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as they are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under the heading "Risks and Uncertainties" herein or in the Annual MD&A, or discussed in the Annual Information Form. There can be no assurance that forward-looking statements will prove to be accurate as actual outcomes and results may differ materially from those expressed in these forward-looking statements. Further, certain forward-looking statements included in this news release may be considered as "financial outlook" for purposes of applicable Canadian securities laws, and as such, the financial outlook may not be appropriate for purposes other than to understand management's current expectations and plans relating to the future, as disclosed in this news release. Forward-looking statements are made as of the date of this news release and, except as expressly required by applicable law, the REIT assumes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

First Quarter 2023 Results Conference Call and Webcast

About Flagship Communities Real Estate Investment Trust

Flagship Communities Real Estate Investment Trust is an internally managed, unincorporated, open-ended real estate investment trust established pursuant to a declaration of trust under the laws of the Province of Ontario. The REIT has been formed to own and operate a portfolio of income-producing manufactured housing communities located in Kentucky, Indiana, Ohio, Tennessee, Arkansas, Missouri, and Illinois, including a fleet of manufactured homes for lease to residents of such housing communities.

SOURCE Flagship Communities Real Estate Investment Trust