Hello ladies and gentlemen, thank you for standing by. Welcome to the Flagship Communities REIT 4th Quarter 2023 earnings call. At this time, all participants are on a listen-only mode. Following the presentation, we will hold a brief question-and-answer session for analysts and institutional investors. I would like to remind everyone that this conference call is being recorded. Today's presenters are Kurt Keeney, Flagship's President and Chief Executive Officer; Nathan Smith, Chief Investment Officer; and Eddie Carlisle, Chief Financial Officer. Please note that comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risk and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR. These documents are also available on Flagship's website at flagshipcommunities.com.
Flagship has also prepared a corresponding PowerPoint presentation, which it encourages you to follow along with during this call. Now I'll pass the call over to Kurt Keeney. Kurt?
Good morning, everybody. Thank you for joining us today. Our third full year as a publicly traded REIT was a tremendous success from both an operating and a financial standpoint. Rental revenue increased by nearly 19.5% compared to last year. NOI grew by 20% compared to the same period last year. FFO increased by nearly 28%, and AFFO increased by 32.5%. We also saw notable increases in our Same Community metrics, which is a good measure of growth and stability of our business. Same Community revenue was up nearly 12% over the same period last year. Same Community NOI was up over 15.5% over last year. Same Community NOI margin was 68.2%, up 1.2% from 66% last year. In addition to our strong financial metrics, we also made significant strides to maintain our conservative low-debt profile subsequent to year-end.
We refinanced our near-term debt at a lower fixed interest rate, resetting our maturities for another 10 years. The cash proceeds were also used to pay off an existing bridge note from one of our recent acquisitions. We now have no substantial debt maturities until 2030. Completing these refinancings at significantly better terms helps improve our financial position and maintain our low-cost-of-capital debt profile. It also speaks to the confidence lenders have in our business and the MHC industry. Our strong performance in 2023 is especially noteworthy when you consider the broader economic environment. We have been able to improve key metrics despite high interest rates and high financing costs that have affected other real estate classes. The underlying fundamentals of the MHC industry remain solid. Manufactured homes are a very appealing and a cost-effective option for many Americans.
Our customers enjoy homes that are detached structures that do not share walls, utilities, air conditioning, or heating with any other homes. These homes include two, three, and four bedrooms, typically with two bathrooms. They also have a deck, yard, driveway, and in-home laundry facilities, all for the cost of renting an apartment or less. Similar to growth, we have seen our key metrics. Our total portfolio occupancy and weighted average revenues have gone up per quarter and have steadily increased since 2019. Our homes are at an affordable price point. The majority of our residents have steady jobs, and they are retired or receiving Social Security, disability, or pension. The interest rates of our customers have not changed substantially, and their credit underwriting remains available. We ended the year with rent collections of 99.4%.
The residents in our communities are less affected by the inflation environment than those with traditional stick-built homes or apartments who are more prone to fluctuation in their rents or mortgage rates. And now I'll turn it over to Nathan to provide more detail on our operating regions and growth strategy. Nathan?
Thanks, Kurt. Good morning, everyone. Our focus is to optimize our current portfolio as well as to add external opportunities that adhere to our strict acquisition criteria. Our existing portfolio provides us with many opportunities for growth potential. This past year, we demonstrated our ability to grow our existing portfolio, which speaks to our operating expertise. We have the ability to grow our portfolio in a variety of ways. The first is through high occupancy rates. As Kurt mentioned in his remarks, we were able to increase our occupancy rates this year. The second is through cost containment initiatives such as water submetering. We continue to implement new submetering technology and water recapture programs across all of our MHCs that allow us to detect water leaks in real time.
These measures have resulted in approximately 25%-35% reduction in water consumption, which is good for our communities and the environment. Finally, customer satisfaction. It sounds simple, but we make sure our customers enjoy living in our communities. Over the past year, we have helped organize holiday and seasonal programming to help bring our community together, and we continue to add desirable amenities such as municipal-grade playgrounds, shuffleboard courts, basketball courts, and now pickleball courts to keep up with the interests of our residents. Turning now to acquisitions, we remain disciplined in our approach. This year, we completed several acquisitions, including a top-tier asset in Evansville, Indiana, as well as a resort-style community. These acquisitions adhere to our strict criteria, which as follows: First, we're looking for opportunities that will be accretive to our adjusted funds from operations per unit.
Second, we are seeking opportunities that will enable us to leverage management synergies and generate economies of scale. And finally, we're seeking acquisition targets within our current markets or adjacent U.S. states where we currently operate with similar regulatory framework and characteristics as the existing markets within our portfolio. The acquisitions we have completed since becoming a public REIT have helped contribute to a steady and measured growth we saw in 2023. As we continue to be well-positioned within the MHC industry, which is primarily comprised of local owner-operators, the top 50 MHC investors are estimated to control approximately 17% of the 4.3 million manufactured housing lots in the United States. There is also a limited supply of new manufactured housing communities.
Given the various layers of regulatory restrictions, competing land uses, and lack of land zoned, which creates high barriers to entry, it is now turning it over to Eddie, our CFO, to talk about our financial performance for the quarter. Eddie?
Thanks, Nathan. Good morning, everyone. We generated revenue of $18.8 million during the fourth quarter, which was up 19.5% over the same period last year, primarily due to lot rent increases and occupancy increases across the portfolio as well as acquisitions. Revenue for the year was $71.1 million, which was an increase of 20.8% for the same reasons. Same community revenues for the fourth quarter and full year 2023 grew by 11.8% and 10.5% respectively over the comparable period last year. These increases were driven by higher monthly lot rents as well as growth in same community occupancy and increases in utility revenue. Net operating income and NOI margin were $12.4 million and 66.3% respectively compared to $10.4 million and 66% during the fourth quarter of 2022.
NOI and NOI margin for the year ended December 31, 2023, were $46.9 million and 66% respectively compared to $38.9 million and 66.2% last year. Same Community NOI margins for the fourth quarter and full year 2023 were 68.2% and 66.5% respectively, which increased 2.2% and 0.1% respectively over the same period of time last year. These increases demonstrated Flagship's ability to develop operational efficiencies the longer the communities are owned by the REIT. AFFO for the fourth quarter of 2023 was $5.5 million and increased 32.5% from the fourth quarter of 2022. AFFO for the year ended December 31, 2023, was $21.6 million, an increase of 17.8% from the same period last year. AFFO per unit for the fourth quarter 2023 was approximately $0.26, an increase of 23.4%. AFFO per unit for the year ended 2023 increased by 11.4%.
Same community occupancy of 84.8% increased by 1.5% versus last year, reflecting our commitment to resident satisfaction and ensuring our communities are desirable locations. Rent collections for the fourth quarter were 99.4%, which demonstrates the strength and the predictability of the MHC sector and was within our expectations. As at December 31, our total lot occupancy was 83.6%, and our average monthly lot rent was $414. Both of these metrics were within our expectations. We remain committed to preserving a conservative debt profile, which is a key driver toward completing the refinancings in the beginning of 2024. Our weighted average mortgage term to maturity is 11 years, and our weighted average mortgage interest rate is 4.04% as at the end of 2023 on a pro forma basis subsequent to the completion of the refinancings in early 2024.
In following the refinancings completed in early 2024, we had total cash and cash equivalents of approximately $20 million with an additional $10 million available on our line of credit. The REIT currently has 16 unencumbered investment properties with a total fair value of $27.1 million as at December 31, 2023. With that, I'll now turn it back over to Kurt for some final remarks. Kurt? Thanks, Eddie. Our financial results during 2023 demonstrate our proven capabilities as operators, the stability of our resident base, and the strength of the MHC industry. Our solid performance gave our board of trustees the confidence to increase our monthly cash distribution by 5% to unit holders for the third consecutive year. Our strong business fundamentals, coupled with the actions we took in the beginning of this year to improve our financial position, provide us with a positive outlook for the remainder of 2024.
We believe we will continue to be poised for growth as housing prices, high monthly rental rates, and mortgage rate increases have the potential to lead more people towards manufactured housing. We are one of the Midwest region's largest MHC operators, and we are the only pure-play manufactured housing investment in the Canadian capital markets. Our REIT offers investors an opportunity to participate in a niche and stable market with significant growth potential. We certainly thank you for your time today, and I will now open up the line for questions.
Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Frank Liu with BMO Capital Markets. Your line is now open.
Thank you, all three there. Good morning, guys. Thanks for taking my questions.
Good morning, Frank.
Good morning. Good morning, Frank.
First of all, just congrats on the refinancing initiatives with a decent rate. I'm just curious with respect to the $1.7 million incremental costs associated with this initiative. I'm just wondering for our modeling purposes, how much of this will now flow through your FFO?
Yeah. So right now, pretty much that full amount will be kind of one-time extraordinary costs that we will look at as a normalized AFFO, reduced from the normalized AFFO number, and we'll be taken out of there.
Okay. Great. Thank you for that. And I just saw that cap rate went up roughly 10 basis points quarter-over-quarter. I guess this is more questions for Nathan. I'm just wondering if this is a reflection of the deals you have seen in the market.
Well, honestly, there are no deals in the market. I've seen very little trade hands in 2024, and there's been very little trade hands in 2025. I mean, in 2023. So, I mean, it's just where it's just like the problem I see out there is that it's almost like there's a standoff. The sellers are looking at it going, "Oh, well, you used to tell me I used to be able to get this amount, but now I can only get this amount." Well, you have to look at them and say, "Yeah, but the interest rate is 3 or 4 percentage points higher now." So they're having a tough.
Yeah. What's saying, Frank?
Yeah.
That I'm having a tough time. I'll just add to some of the reason behind the increase in cap rates. So as we looked across the portfolio and did the analysis, the area that really moved the most were our campground assets. And what it seems to be is the campground assets. And again, it's very small, right? We only have two of those assets. But the cap rate on those, because of the nature of it, changed slightly, and that has been a bigger driver. The actual MHCs themselves saw very little change in cap rates.
Got it. Thank you, both. So just following on that, I mean, you have said there is barely any trades in the market. What do you think in 2024? Do you think more levered buyers will come into the market? Because, I mean, we have seen elevated interest rates for almost two years. Do you think 2024 is going to be the year they start thinking about their portfolio and probably more deals will come to the market?
I have not seen a ton of stuff in the market so far this year. I mean, there's many things that make people sell, right? So I think at some point, it will start moving. And I do think there's a new reality that's coming, Frank. I just don't know that it might not be here until maybe later in 2024.
Great. Thank you. I'll turn it back. That's all for me. Thank you very much, and you guys have a great weekend.
Thanks, Frank.
Thank you.
Thank you. Our next question comes from the line of Mark Rothschild with Canaccord. Your line is now open.
Thanks, Dan. Good morning, guys.
Good morning, Mark.
Good morning, Mark. In regards to the occupancy, which has improved steadily for the most part while you guys have been a public company, do you anticipate consistent occupancy growth in 2024? Maybe on that point, to what extent does interest rates coming down make it easier for you to sell new homes to new tenants and improve occupancy further, or is that not really going to be a factor?
Yeah. Yeah. We absolutely, again, from a modeling perspective, 1.5%-2% is a good model on rent increases or occupancy increases. Don't really see anything hampering that this year. Our customers' interest rates really haven't moved much for the financing of a new home. So if the T-bills came back down, it helps Eddie with the A-notes on any properties that we decide to leverage. It really doesn't impact the retail borrowers that dramatically, actually.
Mark, in the retail, when they buy a home, their taxes and insurance are also in their mortgage payment. By law, it's not a variable rate at all, so it has to be a total turnout. If they bought, we've just not seen much at all on the home sale side of it either.
Okay. Great. Thanks. And the use of the variable rate debt to fund acquisitions, at least before you terminate, is this something that we should expect to see more of and will maybe allow you to continue to be active on acquisitions even if the unit price is not where you want for issuing equity? Is this going to be a consistent strategy, and can this allow you to go longer maybe without needing to issue equity, assuming nothing significant on the acquisition side?
Yeah. So what I'll tell you is the variable rate debt, the bridge notes that we did, were really a function of time. We had a very short timeline where we needed to close on that particular acquisition that we did, which is why we did a bridge note to get it. And it also allowed us to have a little bit of time to work to be able to get some of the work done that we needed to do within some of the properties to then go put the permanent debt on them. For the most part, when we do the acquisitions, I can place the debt usually in plenty of time to still close on the property. 45-60 days is really kind of a norm for us. So I don't foresee us needing to necessarily use that as a tool for all the acquisitions.
What I'll say is, though, to your point, certainly using the debt, whether it's our open-ended kind of facility with Fannie Mae or doing kind of one-off deals, I really think we're going to start seeing LifeCos be back in the market more and being more aggressive. Certainly, it is a lever, assuming that the rate doesn't move, that we would or I'm sorry, that the stock price doesn't move, that we would look to use as we do acquisitions. And the nice thing is the debt markets are wide open. Our lenders are active and excited to do business with us. Obviously, the rate's a little thicker, but it's an option for us to grow without having to go to the market, for sure.
Okay. Great. Thanks so much, guys.
Thank you.
Thanks, Mark.
Our next question comes from the line of Brad Sturges with Raymond James. Your line is now open.
Hey, guys.
Hey, Brad.
Just from the same property NOI perspective, just curious to get thoughts. I guess what would be your rent growth expectations this year? Would it be more in line with, I guess, your historical range kind of 4%-5%?
Yeah. On the rent increase or the occupancy? Which one are you talking about, Brad?
The rent increase for 2024.
We passed along a 7.1% rent increase in January. So if you use 5% in your modeling, I think you're good. But we have not seen any substantial turnover from that. Again, we think ongoing, the right modeling is about 5%, but that helped. The 7.1 helped offset some of the insurance expense and tax expense that's been incurred. But from an occupancy, again, 2%.
Okay. And so what would be your kind of average growth expectation on the operating costs line at this point? Is it in that mid to high single-digit range?
Yeah. I think so. Yeah. That's kind of where we would say. The concern that a lot of people had for us was really a few of their questions were getting around insurance. We did see an insurance increase, but nothing to the extent of what you may have heard on some of the other earnings calls. We saw somewhere in the neighborhood of 10% on insurance, but the other operating costs really have started to somewhat fall back in line. Wage inflation, it seems to be kind of under control for the most part in our markets. And so because we submeter the overwhelming majority of the utilities, that hasn't had as much of an impact on us. And we really haven't seen to this point, outside of new acquisitions, a significant amount of pressure on property taxes, although those are always the ones that concern you.
So yeah, I mean, I think that mid-single digits is kind of where my expectation would be.
Okay. That's helpful. I'll turn it back. Thanks a lot.
Thanks, Brad.
Thank you. Our next question comes from the line of Tom Callaghan with RBC Capital Markets. Your line is now open.
Hey. Morning, guys. Maybe just.
Morning, Tom.
Just one for me. Morning. Maybe just one for me. Going back to the occupancy side of things, I know it's still kind of early days there, but maybe just talk about Evansville market there and anything you're seeing in terms of the benefit from that adjacent community purchase late last year.
Going very well. Our working theory was it was best in market, and we had some vacancy next door. We have immediately started selling brand new homes and the best-in-market asset. And I think we only have six lots before that community will be 100% full, and then we'll start driving that traffic next door. So it's going very well. And Evansville's a good market. They like manufactured housing in Evansville, and we like Evansville.
Got it. Thanks, guys. I'll turn it back.
Thank you. Our next question comes from the line of Matt Kornack with National Bank Financial. Your line is now open.
Hey, guys. Just a few quick ones. With regards to the recoveries this quarter, were there some timing issues? It looked like they were a little high relative to the expense. I guess should that normalize to normal, I guess you recover most of what is spent ultimately.
You're talking recoveries all on utilities?
Yeah.
Yeah. Yeah. So I would expect so our goal and kind of where we normally expect to see things would be in the 90% range. We did have some timing things in the fourth quarter where we filed appeals on places where we've had water leaks or things in previous quarters that came in and affected Q4 positively. But you can expect kind of a normalized 90% is where we would say that is pretty close to being perfect for us.
Okay. No, that's very helpful. Just on the mechanics of the refinancing, so it seemed like there was you addressed existing mortgages. Am I right in saying it was about $30 million of existing mortgages that you upfinanced to about $55 million, and then obviously, you refinanced the bridge loans as well? So net.
It was about $25 million. So the first one was about $25 million that we refinanced and replaced it with the $55 million.
What was the rate on that 25?
The original rate was 5.7% rate of 5.5%. There were four notes there, and the average across the four of them was about 5.5% on those previous ones.
Okay. And then I guess your cash balance as a result will be elevated. And just going back to your commentary earlier about the acquisition opportunities and markets, should we anticipate you're going to carry a bit higher cash until you can deploy it, or do you have a use of proceeds for those or for the cash at this point?
Yeah. At this point, the expectation is we'd carry a little more cash until we have the deal ready to go.
Okay. Thanks.
Until we did further acquisitions.
Makes sense.
Thank you. As a reminder, to ask a question at this time, please press star 11 on your touch-tone telephone. Our next question comes from the line of Alexandre Leon with Desjardins Capital Markets. Your line is now open.
Hey. Good morning, everyone, and congrats on a strong quarter. Just maybe a little.
Thanks, Joe.
Maybe a little quick modeling question for me. So there was a notable increase in the other revenue this quarter, I believe, fees from Empower. Just wondering if you can maybe comment on the drivers of that and whether the fourth quarter would be an appropriate run rate for a quarterly run rate for 2024?
Yeah. So I'd say fourth quarter is a pretty appropriate run rate there. We've seen some benefits of some just overall revenue programs that we've put in place as it relates to some of the utilities and some of the recapture programs that we've put in place. And that continues to kind of be where we focus because not only is it a revenue driver, but it's an ESG bone for us, right? We have very few areas where, from an environmental standpoint, we can really drop some results. And when we do these projects, not only does it enhance our earnings, but it also we've seen where we have up to 30% reduction in usage within a community, 30%-35%. So that's a place that we certainly focus.
I would say from a modeling standpoint, yeah, fourth quarter should be pretty accurate, what it would look like moving forward.
Okay. Awesome. Thanks for that. That's it for me. Congrats again on a strong quarter, and have a great weekend, guys.
Thanks. Thanks, Joe.
Thank you.
Our next question comes from the line of David Chrystal with Echelon. Your line is now open.
Hey. Morning, guys.
Morning, David.
At year-end, your unencumbered asset pool sat at, I think, 16 properties, $27 million. Did the post-quarter refinancing pull any assets from that pool, or is it still the full $27 million and 16 properties?
No. Actually, went the other way, Dave. One of the properties that had a bridge note, we actually used proceeds from that refinance to pay it off. So that number actually went to 17 properties and a little over $30 million of unencumbered assets.
Okay. And then between the cash-like unencumbered asset pool and, I guess, obviously, your debt to GBV increased a little post-quarter, what's your kind of target leverage, and where would you see your acquisition capacity within that framework?
Yeah. So I mean, we've talked about kind of even all the way back to when we had the IPO, our leverage at that point was 49.8%. And we'd always said that our target was between 45%-55%. I don't anticipate we'll get back anywhere close to the place we were at IPO. But certainly, moving it up incrementally, looking at additional acquisitions, I think we could go out right now and do $60 million of acquisitions just through some debt and keep our leverage kind of where we're comfortable with. Obviously, our goal has always been to drive leverage down. Unfortunately, where share prices is right now, debt is certainly an option for us, and we'll use that where appropriate. But long-term, our goal is to absolutely drive leverage down when the market allows it.
Okay. Great. Appreciate that. I'll turn it back.
Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Kurt Keeney for closing remarks.
Thank you, operator, and thank you, everyone, for participating. Please feel free to reach out to our investor relations team at ir@flagshipcommunities.com if you have any further questions. Happy Friday, everybody.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.