Flagship Communities Real Estate Investment Trust Announces Second Quarter 2024 Results

Second Quarter 2024 Results:

• Rental revenue for the three months ended June 30, 2024 was $21.2 million, an increase of 22.2% compared to $17.4 million for the three months ended June 30, 2023
• Same Community Revenue¹ for the three months ended June 30, 2024 was $18.9 million, up 10.8% compared to $17.1 million for the three months ended June 30, 2023
• Net income and comprehensive income for the three months ended June 30, 2024 was $43.5 million compared to $21.4 million for the three months ended June 30, 2023
• Net Operating Income (“NOI”) for the three months ended June 30, 2024 was $14.1 million, up 21.4% compared to $11.6 million for the three months ended June 30, 2023
• Same Community NOI¹ for the three months ended June 30, 2024 was $12.4 million, an increase of 8.7%, compared to $11.4 million for the three months ended June 30, 2023
• NOI Margin¹ for the three months ended June 30, 2024 was 66.2% compared to 66.6% for the three months ended June 30, 2023
• Same Community NOI Margin¹ for the three months ended June 30, 2024 was 65.7%, compared to 67.0% for the three months ended June 30, 2023
• Funds from operations (“FFO”) per unit (diluted)² for the three months ended June 30, 2024 was $0.330 compared to $0.297 for the three months ended June 30, 2023, which was an increase of $0.033 per unit, or 11.1%
• FFO adjusted per unit (diluted)² for the three months ended June 30, 2024 was $0.314 compared to $0.297 for the three months ended June 30, 2023 which was an increase of $0.017 per unit, or 5.7%
• Adjusted funds from operations (“AFFO”) per unit (diluted)² for the three months ended June 30, 2024 was $0.292 compared to $0.260 for the three months ended June 30, 2023 which was an increase of $0.032 per unit, or 12.3%
• AFFO adjusted per unit (diluted)² for the three months ended June 30, 2024 was $0.276 compared to $0.260 for the three months ended June 30, 2023 which was an increase of $0.016 per unit, or 6.2%
• Rent Collections¹ for the three months ended June 30, 2024 was 98.7%, which was a decrease of (0.2)% when compared to the three months ended June 30, 2023
• The REIT completed an expansion in one of its Same Community properties where it added 81 additional lots. The REIT expects to have these lots occupied in the normal course of business
• Flagship completed the largest acquisition in the REIT’s history, whereby Flagship acquired seven manufactured housing communities (“MHCs”), expanding its existing footprint in Tennessee and establishing a new presence in West Virginia, representing the eighth contiguous U.S. state where the REIT will operate (the “Expansion Acquisitions”)
• The REIT raised gross proceeds of $60 million through the issuance of 3,910,000 Units at a price of US$15.35 per Unit, the net proceeds of which, were used to partially fund the Expansion Acquisitions
• Flagship was awarded Community of the Year for the third consecutive year by the Kentucky Manufactured Housing Institute (“KMHI”). Flagship also received awards for Retailer of the Year and Retail Salesperson of the Year

As at June 30, 2024

• NAV¹ and NAV per Unit¹ as at June 30, 2024 was $620.3 million and $24.75, respectively, compared to $525.1 million and $24.84, respectively
• Debt to Gross Book Value¹ as at June 30, 2024 was 39.6% compared to 40.3% as at December 31, 2023
• Total portfolio occupancy was 83.9% as at June 30, 2024, a 0.6% increase from June 30, 2023
• Same Community¹ occupancy was 85.0% as at June 30, 2024, a 0.5% increase from June 30, 2023

¹See “Other Real Estate Industry Metrics”

²See “Non-IFRS Financial Measures”

“During the second quarter, we significantly expanded our presence in Tennessee by entering Nashville, as well as West Virginia, our eighth contiguous state of operations, with the largest acquisition in our history,” said Kurt Keeney, President and CEO. “Our performance in 2024 to date has been strong and we continue to demonstrate the merits of our business model and the MHC industry through the growth of our key metrics. Our Rental revenue, NOI and Same Community metrics have all improved relative to last year.”

Financial Summary

Financial Overview

Rental revenue and related income in the second quarter of 2024 was $21.2 million, up 22.2% compared to the same period last year. This increase was primarily driven by Acquisitions as well as lot rent increases and occupancy increases across the portfolio.

Same Community Revenues for the second quarter of 2024 were $18.9 million, approximately $1.8 million higher than the same period last year. This increase was a result of increasing monthly lot rent year over year, growth in Same Community Occupancy, and increased utility revenues.

Net income and comprehensive income for the three months ended June 30, 2024 was $22.1 million more than the same period last year, as a result of the fair value adjustments on investment properties and Class B Units of Flagship Operating, LLC (“Class B Units”) being $20.2 million more than in the same period in 2023.

NOI and NOI Margin for the second quarter of 2024 were $14.1 million and 66.2%, respectively, compared to $11.6 million and 66.6% during the second quarter of 2023. Same Community NOI Margin for the second quarter ended June 30, 2024 was 65.7%, which was a decrease of 1.3% over the same period last year. The decrease in NOI margins were driven by increased staffing levels in 2024 as well as increased costs related to property taxes and maintenance items.

Same Community Occupancy was 85.0% as at June 30, 2024. One community completed an expansion that resulted in an addition of 81 lots, with capacity for another 200 lots. The addition of these 81 lots decreased Same Community Occupancy by approximately 0.5%, as at June 30, 2024, but the REIT expects to have these lots occupied, and to add additional lots to meet demand, in the normal course of business.

Adjusted for the impact of this expansion, total portfolio occupancy and Same Community Occupancy would have been 84.3% and 85.5% as at June 30, 2024.

AFFO for the second quarter of 2024 was $7.0 million, an increase of 28.5% from the second quarter of 2023. AFFO per unit for the three months ended June 30, 2024 was $0.292, an increase of 12.3% from the same period last year.

AFFO adjusted, which is defined as AFFO adjusted for transactions that are not considered recurring measures of economic earnings, was $6.6 million for the second quarter of 2024, a 21.2% increase compared to the same period last year. AFFO adjusted per unit for the second quarter of 2024 was $0.276, a 6.2% increase compared to the same period in 2023.

Rent Collections for the second quarter of 2024 remained stable at 99.2%, compared to the same period last year.

As at June 30, 2024 the REIT’s Weighted Average Mortgage and Note Term to maturity (see “Other Real Estate Industry Metrics” for more information) was 9.6 years. The REIT’s Weighted Average Mortgage and Note Interest Rate (see “Other Real Estate Industry Metrics” for more information) was 4.40%. Flagship has no substantial debt maturities until 2030.

Flagship’s Liquidity (see “Other Real Estate Industry Metrics” for more information) was approximately $23.9 million consisting of cash, cash equivalents, and available capacity on lines of credit.

Operations Overview

During the second quarter of 2024, Flagship completed the largest acquisition in the REIT’s history by acquiring seven MHCs, expanding and strengthening its existing footprint in Tennessee by entering Nashville, one of the fastest growing markets in the U.S.

The Expansion Acquisitions also form a foothold in a new market, West Virginia, with five distinct locations within the state. West Virginia represents the eighth contiguous U.S. state where the REIT will operate.

Also, during the quarter, Flagship raised gross proceeds of approximately US$60 million through the issuance of 3,910,000 Units at a price of US$15.35 per Unit. The net proceeds were used to partially fund the Expansion Acquisitions.

For the third consecutive year, Flagship was awarded Community of the Year by the KMHI. The award was granted to the REIT’s White Pine Pointe community.

In a short span of 15-months, Flagship added new amenities to this 345-lot community, which include a brand-new clubhouse, a municipal grade playground, a pickleball court, dozens of new homes, along with street paving and new solar lighting.

Flagship also received awards for Retailer of the Year and Retail Salesperson of the Year.

As at June 30, 2024, the REIT owned a 100% interest in a portfolio of 80 MHCs with 14,635 lots as well as two recreational vehicle (“RV”) resort communities with 470 sites. The table below provides a summary of the REIT’s portfolio as of June 30, 2024, compared to December 31, 2023:

Outlook

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 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 (including distributions on the Class B Units), unrealized fair value adjustments to Class B Units, unrealized fair value adjustments to investment properties, unrealized fair value adjustments to unit based compensation, 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 (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, FFO adjusted, FFO adjusted per unit, AFFO, AFFO per unit, AFFO adjusted and AFFO adjusted per unit” for a reconciliation of FFO to FFO adjusted 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 Restricted Units (“RUs”) and vested Deferred Trust Units (“DTUs”)) during the period.

“FFO adjusted” is defined as FFO adjusted for non-real estate industry specific operating transactions. FFO adjusted presents FFO in a normalized manner that is substantially in accordance with REALPAC’s recommendations. FFO adjusted may, as transactions occur, include adjustments that were not included in the definition of FFO adjusted in a previous period but are included in the current period to present FFO in a normalized manner that is substantially in accordance with REALPAC’s recommendations. For the three and six months ended June 30, 2024 adjustments include mortgages payable settlement expense, which is comprised of prepayment penalties, defeasance, amortization of financing costs, and other costs associated with the refinance and payoff of certain mortgages payable prior to maturity. Adjustments also include insurance proceeds related to covered damage of investment property which was not an adjustment included in FFO adjusted in the previous period.

“FFO adjusted per unit (diluted)” is defined as FFO adjusted 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 $75 per lot per year and $1,100 per rental home per year, for the year ending December 31, 2024, ($60 per lot per year and $1,000 per rental home per year, for the year ended December 31, 2023) 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, FFO adjusted, FFO adjusted per unit, AFFO, AFFO per unit, AFFO adjusted and AFFO adjusted per unit” for a reconciliation of AFFO to AFFO adjusted 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.

“AFFO adjusted” is defined as AFFO adjusted for transactions that are not considered recurring measures of economic earnings with the goal of presenting AFFO in a normalized manner that is substantially in accordance with REALPAC’s recommendations. AFFO adjusted may, as transactions occur, include adjustments that were not included in the definition of AFFO adjusted in a previous period but are included in the current period to present AFFO in a normalized manner that is substantially in accordance with REALPAC’s recommendations. For the three and six months ended June 30, 2024 adjustments include mortgages payable settlement expense, which is comprised of prepayment penalties, defeasance, amortization of financing costs, and other costs associated with the refinance and payoff of certain mortgages payable prior to maturity. Adjustments also include insurance proceeds from covered damages to investment property which was not an adjustment included in AFFO adjusted in the previous period.

“AFFO adjusted Payout Ratio” is defined as total cash distributions of the REIT (including distributions on Class B Units) divided by AFFO adjusted.

“AFFO adjusted per unit (diluted)” is defined as AFFO adjusted 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 and AFFO adjusted in assessing its distribution paying capacity.

Other Real Estate Industry Metrics

Additionally, this news release contains several other real estate industry financial metrics:

• “Acquisitions” means the REIT’s properties, excluding Same Community (as defined below) (i.e., Acquisitions Revenue, as well as Acquisitions net operating income (“NOI”), and Acquisitions NOI Margin (as defined below)), and such measure is 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.
• “Debt to Gross Book Value” is calculated by dividing indebtedness, which consists of the total principal amounts outstanding under mortgages payable, net and credit facilities, by Gross Book Value (as defined below). Refer to section “Calculation of Other Real Estate Industry Metrics – Debt to Gross Book Value”
• “Gross Book Value” means, at any time, the greater of: (a) the value of the assets of the REIT and its consolidated subsidiaries, as shown on its then most recent consolidated statement of financial position prepared in accordance with IFRS, less the amount of any receivable reflecting interest rate subsidies on any debt assumed by the REIT; and (b) the historical cost of the investment properties, plus (i) the carrying value of cash and cash equivalents, (ii) the carrying value of mortgages receivable; and (iii) the historical cost of other assets and investments used in operations.
• “Liquidity” is defined as (a) cash and cash equivalents, plus (b) borrowing capacity available under any existing credit facilities.
• “Net Asset Value” or “NAV” is calculated by taking unitholders’ equity plus Class B Units. NAV provides an indication of the total value of the REIT’s investment properties, after accounting for outstanding mortgages and notes payable. NAV also provides an indication of the changes in the REIT’s overall value resulting from the performance of its assets.
• “Net Asset Value per Unit” or “NAV per Unit” is defined as NAV divided by the total number of units (including Units, Class B Units, vested RUs and vested DTUs) outstanding.
• “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 the first day of the preceding calendar year by the REIT and such measures (i.e., Same Community Revenue, as well as Same Community NOI, Same Community NOI Margin, and Same Community Occupancy) are used by management to evaluate period-over-period performance.
• “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 and Note Interest Rate” is calculated by multiplying each mortgages and note’s interest rate by the mortgage and note balance and dividing the sum by the total mortgage and note balance.
• “Weighted Average Mortgage and Note Term” is calculated by multiplying each mortgages and note’s remaining term by the mortgage and note balance and dividing by the sum by the total mortgage balance.

Reconciliation of FFO, FFO per unit, FFO adjusted, FFO adjusted per unit, AFFO, AFFO per unit, AFFO adjusted and AFFO adjusted per unit

Calculation of Other Real Estate Industry Metrics

NOI and NOI Margin

NAV and NAV per Unit

Debt to Gross Book Value

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, objectives and creation of long-term value; the REIT’s intention to continue to expand in its existing operational footprint, increasing its presence in core markets to enhance efficiencies and achieve economies of scale, and target growth markets, the REIT’s intention to convert rental homes to tenant owned homes as opportunities allow; expected sources of funding for future acquisitions and the expected performance of 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 REIT’s distribution policy and intended sources of cash therefor; the REIT’s target indebtedness as a percentage of Gross Book Value; the REIT’s intentions with respect to the May 2024 Bridge Note (as defined herein); and the expectations regarding occupancy of added lots and the addition of further lots. 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; 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 or referenced under the heading “Risks and Uncertainties” in the REIT’s most recent annual or interim Management’s Discussion & Analysis. 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.

Second Quarter 2024 Results Conference Call and Webcast

About Flagship Communities Real Estate Investment Trust

Flagship Communities Real Estate Investment Trust is a leading operator of affordable residential Manufactured Housing Communities primarily serving working families seeking affordable home ownership. The REIT owns and operates exceptional residential living experiences and investment opportunities in family-oriented communities in Kentucky, Indiana, Ohio, West Virginia, Tennessee, Arkansas, Missouri, and Illinois. To learn more about Flagship, visit www.flagshipcommunities.com.

For further information, please contact:

Eddie Carlisle, Chief Financial Officer
Flagship Communities Real Estate Investment Trust
Tel: +1 (859) 568-3390