UMH

UMH Properties, Inc. (United Mobile Homes, Inc.) - 2002 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2002. United Mobile Homes, Inc. (UMH) is a Real Estate Investment Trust (REIT) incorporated in New Jersey. The Company owns and operates 25 manufactured home communities containing 5,979 sites located in New Jersey, New York, Ohio, Pennsylvania, and Tennessee. UMH leases manufactured home spaces to private owners and also leases approximately 490 company-owned homes to residents. Effective April 1, 2001, the Company began selling manufactured homes through a wholly-owned subsidiary to enhance occupancy.

Key Financial Metrics

Liquidity: The Company held $2,338,979 in cash and cash equivalents. It utilized its full $2,000,000 unsecured line of credit with Fleet Bank. The Company also held $32,784,968 in securities available for sale.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 9.5% to $29.4 million, driven by a 4.4% increase in rental income (due to a 3% average rent increase and a new community acquired in 2001) and a 31% increase in interest/dividend income from a growing securities portfolio.
• Profitability: Net income rose 17.3% to $6.5 million. This was significantly aided by a $664,546 gain on the sale of vacant land in Pennsylvania (a $661,000 gain), compared to a loss of $28,264 in 2001.
• Expenses: Interest expense increased 17.3% to $3.3 million due to higher average principal balances. Community operating expenses rose 5.0% primarily due to increased insurance costs and personnel expenses.
• Capital Structure: Mortgages payable increased by $4.7 million to $43.3 million. The Company purchased $9.4 million in REIT securities during 2002.

Guidance, Outlook, and Risks

Outlook: Management anticipates continuing profits in 2003. They expect modest inflation to allow for rent increases that match operating expense growth. The Company plans to budget approximately $1,000,000 for capital improvements (excluding expansions) and purchase approximately 25 rental homes for $500,000 in 2003.

Risks and Contingencies:

• REIT Qualification: The Company must distribute at least 90% of taxable income to maintain REIT status. Failure to qualify would subject the Company to corporate income taxes, significantly reducing cash flow.
• Interest Rate Risk: The Company has approximately $12.4 million in variable-rate debt (margin loans and lines of credit). Rising rates could increase expenses.
• Environmental Liability: The Company operates 11 communities with their own water/sewer systems, subject to state testing requirements. While no material liabilities are currently known, future environmental costs are a risk.
• Competition: Increased competition for manufactured home community acquisitions has driven up purchase prices and fixed costs.

Investor Verification Checklist

• REIT Compliance: Verify that the Company distributed at least 90% of its taxable income to maintain tax-exempt status.
• Debt Maturities: Review the schedule of mortgage maturities; significant principal payments are due in 2003 ($4.5M) and 2004 ($10.4M).
• Non-Recurring Gains: Note that 2002 Net Income included a $661,000 gain from the sale of vacant land; assess core operating performance excluding this item.
• Variable Rate Exposure: Monitor the $12.4 million in variable-rate debt and the impact of potential interest rate hikes on cash flow.
• Occupancy Rates: Review occupancy trends, noting that eight communities had vacancies over 10% in 2002, though some were due to planned expansions.