UMH Properties, Inc. (United Mobile Homes, Inc.) - 2004 Annual Report Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2004. United Mobile Homes, Inc. (UMH) is a Real Estate Investment Trust (REIT) incorporated in Maryland. The Company owns and operates 27 manufactured home communities containing approximately 6,200 sites located in New Jersey, New York, Ohio, Pennsylvania, and Tennessee. Its primary business involves leasing manufactured home spaces to private owners on a month-to-month basis. Additionally, through a taxable REIT subsidiary, UMH Sales and Finance, Inc., the Company sells and finances manufactured homes to residents.
Key Financial Metrics (Year Ended Dec 31, 2004)
- Total Revenues: $34,357,882 (up from $33,790,503 in 2003).
- Net Income: $8,201,749 (down from $8,517,531 in 2003).
- Net Income Per Share (Basic): $0.95 (down from $1.08 in 2003).
- Funds from Operations (FFO): $11,355,784 (down slightly from $11,370,712 in 2003).
- Operating Cash Flow: $5,115,754 provided by operating activities.
- Total Assets: $103,164,988.
- Total Liabilities: $54,360,245.
- Shareholders' Equity: $48,804,743.
- Debt: Mortgages payable totaled $50,501,243. The Company also held $23,821,078 in securities available for sale.
- Dividends: Total distributions of $8,149,313 ($0.9450 per share) were paid to shareholders.
Material Changes vs. Prior Period
- Acquisitions: In March 2004, the Company acquired Bishop's Mobile Home Court and Whispering Pines Community in Somerset Township, Pennsylvania (renamed Somerset Estates), adding 139 sites and 60 acres for expansion for approximately $3.5 million.
- Revenue Growth: Rental and related income increased 3.3% to $21,646,325, driven by rent increases (average 3-4%) and the new acquisition. Sales of manufactured homes increased to $7,286,610.
- Net Income Decline: Despite revenue growth, Net Income decreased by $315,782. This was primarily due to a $233,237 decrease in gains on securities transactions and a loss on settlement of futures contracts ($243,360).
- Expense Trends: Community operating expenses increased to $10,984,908 due to acquisitions and higher real estate taxes. Interest expense decreased to $2,529,752 due to lower loan balances.
- Financial Restatement: The Company restated financial statements for 2002, 2003, and the first three quarters of 2004. This was due to improper accounting for interest rate swaps (failure to meet hedge accounting documentation requirements under FAS 133). The restatement resulted in recognizing fair value adjustments in the income statement rather than treating swaps as embedded derivatives.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates 2005 renovation expenditures to be consistent with 2004 (approx. $3 million) and budgets approximately $1 million for capital improvements. The Company plans to purchase approximately 25 manufactured homes for rental use in 2005.
- Internal Control Weakness: Management and the independent auditor (KPMG LLP) concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004. A material weakness was identified regarding the selection and application of accounting policies for interest rate swaps. Remediation efforts included implementing a comprehensive review process for new swaps by the CFO.
- Risks:
- Refinancing Risk: Significant debt maturities exist; the Company relies on its ability to refinance or sell assets to meet obligations.
- REIT Qualification: Failure to qualify as a REIT would subject the Company to corporate income tax, significantly reducing cash flow.
- Market Conditions: Competition for acquisitions is high, and occupancy is challenged by low interest rates making site-built housing more accessible.
- Interest Rate Risk: While swaps fix rates on ~$26 million of debt, $3 million of variable rate debt remains exposed to prime rate fluctuations.
- Unusual Items: The restatement of prior periods due to derivative accounting errors is a significant unusual item affecting comparability of historical earnings.
Investor Verification Checklist
- Verify the impact of the financial restatement on historical earnings and the specific adjustments made to interest expense and net income for 2002-2004.
- Review the material weakness in internal controls regarding derivative accounting and the specific remediation steps taken by management.
- Assess the debt maturity schedule and the Company's ability to refinance $50.5 million in mortgages, particularly given the competitive acquisition environment.
- Monitor the occupancy rates (stable at 86% in 2004) and the effectiveness of rent increases in offsetting rising operating expenses.
- Confirm the REIT compliance status and the sufficiency of distributions to maintain tax-advantaged status.