UMH Properties, Inc. 2006 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: UMH Properties, Inc. (formerly United Mobile Homes, Inc.)
Reporting Period: Fiscal year ended December 31, 2006
Business Model: The Company is a Real Estate Investment Trust (REIT) that owns and operates 28 manufactured home communities containing approximately 6,700 sites across New Jersey, New York, Ohio, Pennsylvania, and Tennessee. Its primary revenue source is leasing land sites to private manufactured home owners. Through a taxable REIT subsidiary, it also sells and finances manufactured homes to residents.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $42,644,610 | $39,339,573 |
| Net Income | $5,840,277 | $6,990,342 |
| Net Income Per Share (Diluted) | $0.58 | $0.74 |
| Funds from Operations (FFO) | $9,097,444 | $10,300,749 |
| Operating Cash Flow | $4,161,938 | $3,034,698 |
| Total Assets | $115,740,444 | $114,782,535 |
| Mortgages Payable | $46,817,633 | $48,706,241 |
| Shareholders' Equity | $57,640,419 | $54,839,324 |
| Occupancy Rate | 82% | 85% |
| Dividends Per Share | $0.985 | $0.9775 |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased approximately 16% ($1.15 million) compared to 2005. This was primarily driven by a $966,000 decrease in gains on securities transactions (due to an $823,000 impairment write-down) and a $1.07 million increase in interest expense.
- Revenue Growth: Total revenues increased 8.4%. Rental income rose 4% due to community expansions and rent increases. Sales of manufactured homes increased 27% to $15.8 million, with gross profit margins improving from 19.9% to 21.3%.
- Occupancy Pressure: Overall occupancy declined from 85% to 82%. This was partially attributed to the acquisition of Weatherly Estates (which was 59% occupied at purchase) and the net loss of approximately 100 units despite placing 280 new homes.
- Acquisitions: The Company acquired Weatherly Estates I in Tennessee for approximately $5.2 million in March 2006.
Guidance, Outlook, and Risks
- Capital Expenditures: Management anticipates 2007 renovation expenditures will be consistent with 2006 levels (approx. $2.5 million). An additional $1.0 million is budgeted for capital improvements, and approximately $1.25 million is planned for purchasing 50 new rental homes.
- Liquidity: The Company maintains $15 million in unused lines of credit and holds $17.9 million in securities available for sale. It relies on its Dividend Reinvestment and Stock Purchase Plan (DRIP) for capital, which generated $6.9 million in 2006.
- Key Risks:
- Interest Rate Risk: Significant exposure to variable rate debt, though mitigated by interest rate swaps fixing rates on approximately $24 million of debt.
- REIT Qualification: Failure to qualify as a REIT would subject the Company to corporate income taxes and bar qualification for four years.
- Market Competition: Competition for acquisitions has increased purchase prices, and low interest rates for site-built housing hinder occupancy growth.
- Environmental Liability: Potential liability for cleanup of hazardous substances at properties with wastewater treatment facilities.
- Subsequent Event: On January 31, 2007, the Company obtained an $11.48 million mortgage on Fairview Manor to refinance existing debt and pay down lines of credit.
Investor Verification Checklist
- Occupancy Trends: Verify the trajectory of the 82% occupancy rate and the impact of the new Weatherly Estates acquisition on future cash flows.
- Security Portfolio Impairment: Review the $823,249 impairment charge on securities available for sale to assess the stability of the investment portfolio.
- Debt Maturity Wall: Confirm refinancing plans for mortgages maturing in 2007 (approx. $6.7 million principal) and the impact of rising interest rates on variable debt.
- REIT Compliance: Ensure the Company continues to meet the 90% distribution requirement to maintain tax-advantaged status.
- Internal Controls: Note the change in auditors from KPMG to Reznick Group in 2005 following a material weakness in accounting for derivatives; verify the effectiveness of new controls implemented.