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UMH > SEC Filings for UMH > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for UMH PROPERTIES, INC.


13-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein and in our annual report on Form 10-K for the year ended December 31, 2011.

The Company is a self-administered, self-managed, real estate investment trust (REIT) with headquarters in Freehold, New Jersey. The Company's primary business is the ownership and operation of manufactured home communities - leasing manufactured home spaces on a month-to-month basis to private manufactured home owners. The Company also leases homes to residents and, through its taxable REIT subsidiary, UMH Sales and Finance, Inc. (S&F) sells and finances homes to residents and prospective residents of our communities. At September 30, 2012, the Company owned fifty-five communities containing approximately 10,400 developed homesites. These communities are located in New Jersey, New York, Ohio, Pennsylvania, Tennessee and Indiana. The Company also invests in securities of other REITs.

The Company's income primarily consists of rental and related income from the operation of its manufactured home communities. Income also includes sales of manufactured homes.

Although current economic indicators show the US economy to be improving, the rate of recovery has been much slower than anticipated. However, activity in our communities has recently increased. Occupancy has increased from 77% at year-end to 80% currently. We have seen an increase in sales during 2012. We are also seeing increased demand for rental units and during 2012, have added a net of approximately 220 rental units to selected communities. Occupied rental units represent approximately 13% of total occupied sites at quarter end. We hope to convert renters to new homeowners in the future.

The Company also holds a portfolio of securities of other REITs with a fair value of $53,567,433 at September 30, 2012, which earns dividend and interest income. The dividends received from our securities investments were at a weighted-average yield of approximately 6.5% as of September 30, 2012. During the nine months ended September 30, 2012, the Company recognized gains on sales of securities of $3,495,730. At September 30, 2012, the Company had net unrealized gains of $7,577,828 in its REIT securities portfolio. The Company invests in REIT securities on margin from time to time when the Company can achieve an adequate yield spread. The REIT securities portfolio provides the Company with liquidity and additional income and serves as a proxy for real property investments.

The Company intends to continue to increase its real estate investments. Over the past


two years, we added twelve manufactured home communities, encompassing approximately 2,100 developed homesites, to our portfolio. During fiscal 2012, we acquired 15 manufactured home communities totaling approximately 1,500 sites.
We have been positioning ourselves for future growth and will continue to seek opportunistic investments.

On April 10, 2012, the Company issued 1,075,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock at an offering price of $25.292 per share in an underwritten public offering, which includes accrued dividends. The Company received net proceeds from the offering of approximately $25.7 million and intends to use the net proceeds to purchase additional properties, including the acquisitions of the 14 communities which closed throughout the quarter, and for other general corporate purposes, including possible repayment of indebtedness.

On October 31, 2012, the Company issued 1,250,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock at an offering price of $25.50 per share in a registered direct placement. The Company received net proceeds from the offering, after the placement agent's fee and other estimated offering expenses, of approximately $31 million and intends to use the net proceeds to purchase additional properties in the ordinary course of business, including its pending acquisition, and for other general corporate purposes, including possible repayment of indebtedness.

See PART I, Item 1 - Business in the Company's 2011 annual report on Form 10-K for a more complete discussion of the economic and industry-wide factors relevant to the Company and the opportunities and challenges, and risks on which the Company is focused.

Changes In Results Of Operations

Rental and related income increased 16% from $8,482,122 for the three months ended September 30, 2011 to $9,836,479 for the three months ended September 30, 2012. Rental and related income increased 12% from $24,460,311 for the nine months ended September 30, 2011 to $27,503,514 for the nine months ended September 30, 2012. This was primarily due to the acquisitions made during 2011 and 2012, and an increase in rental home income. Occupancy increased from 77% at year-end to 80% currently.

Sales of manufactured homes amounted to $2,350,189 and $1,182,455 for the quarters ended September 30, 2012 and 2011, respectively. Sales of manufactured homes amounted to $6,718,129 and $3,826,400 for the nine months ended September 30, 2012 and 2011, respectively. Cost of sales of manufactured homes amounted to $2,103,234 and $1,061,969 for the quarters ended September 30, 2012 and 2011, respectively. Cost of sales of manufactured homes amounted to $6,143,637 and $3,519,974 for the nine months ended September 30, 2012 and 2011, respectively.
Selling expenses amounted to $540,831 and $638,649 for the quarters ended September 30, 2012 and 2011, respectively. This decrease is related to a decrease in provision for bad debts and a decrease in travel and other selling expenses. Selling expenses amounted to $1,600,576 and $1,514,416 for the nine months ended September 30, 2012 and 2011, respectively. These increases are directly attributable to the increase in sales. Loss from the sales operations (defined as sales of manufactured homes less cost of sales of manufactured homes less selling


expenses) amounted to $293,876 or 13% of total sales, and $518,163 or 44% of total sales for the quarters ended September 30, 2012 and 2011, respectively.
Loss from the sales operations amounted to $1,026,084 or 15% of total sales, and $1,207,990 or 32% of total sales for the nine months ended September 30, 2012 and 2011, respectively. The gross profit percentage was 11% and 10% for the quarters ended September 30, 2012 and 2011, respectively. The gross profit percentage was 9% and 8% for the nine months ended September 30, 2012 and 2011.
Activity in our communities has increased. The Company believes that sales of new homes produces new rental revenue and is an investment in the upgrading of the communities.

Community operating expenses increased 14% from $4,649,061 for the quarter ended September 30, 2011 to $5,293,777 for the quarter ended September 30, 2012.
Community operating expenses increased 13% from $13,248,955 for the nine months ended September 30, 2011 to $14,967,951 for the nine months ended September 30, 2012. This was primarily due to the acquisitions made during 2011 and 2012 and an increase in personnel and related costs. General and administrative expenses increased 12% from $1,132,796 for the quarter ended September 30, 2011 to $1,266,191 for the quarter ended September 30, 2012. General and administrative expenses increased 20% from $3,124,761 for the nine months ended September 30, 2011 to $3,756,257 for the nine months ended September 30, 2012. This was primarily due to an increase in compensation and related costs. Acquisition costs increased from $25,813 for the quarter ended September 30, 2011 to $483,119 for the quarter ended September 30, 2012. Acquisition costs increased from $161,439 for the nine months ended September 30, 2011 to $753,060 for the nine months ended September 30, 2012. Acquisition costs relate to transaction and due diligence costs associated with the acquisitions of the communities. Depreciation expense increased 22% from $1,580,906 for the quarter ended September 30, 2011 to $1,930,158 for the quarter ended September 30, 2012.
Depreciation expense increased 20% from $4,371,441 for the nine months ended September 30, 2011 to $5,231,579 for the nine months ended September 30, 2012.
This was primarily due to the acquisitions made during 2011 and 2012.

Interest income remained relatively stable for the quarter and nine months ended September 30, 2012. Dividend income increased 27% from $653,954 for the quarter ended September 30, 2011 to $830,303 for the quarter ended September 30, 2012.
Dividend income increased 39% from $1,725,969 for the nine months ended September 30, 2011 to $2,404,045 for the nine months ended September 30, 2012.
This was primarily due to an increase in securities available for sale. The average balance of the securities portfolio was approximately $48,400,000 and $33,800,000 at September 30, 2012 and 2011, respectively.

Gain on securities transactions, net amounted to $1,214,664 and $486,087 for the quarter ended September 30, 2012 and 2011, respectively. Gain on securities transactions, net amounted to $3,495,730 and $2,027,943 for the nine months ended September 30, 2012 and 2011, respectively. The market for REIT securities has continued to improve. At September 30, 2012, the Company had net unrealized gains of $7,577,828 in its REIT securities portfolio. The dividends received from our securities investments continue to meet our expectations. It is our intent to hold these securities long-term.

Other income amounted to $52,195 and $36,656 for the quarter ended September 30, 2012 and 2011, respectively. Other income amounted to $607,454 and $61,898 for the nine


months ended September 30, 2012 and 2011, respectively. This increase was primarily due to the amount received on an oil and gas lease on a community.

Interest expense increased 23% from $1,374,601 for the quarter ended September 30, 2011 to $1,689,112 for the quarter ended September 30, 2012. This increase is due to the new loan for the eleven community acquisition. Interest expense remained relatively stable for the nine months ended September 30, 2012.

Amortization of financing costs remained relatively stable for the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011.

Income from community operations amounted to $4,542,702 and $3,833,061 for the quarter ended September 30, 2012 and 2011, respectively. Income from community operations amounted to $12,535,563 and $11,211,356 for the nine months ended September 30, 2012 and 2011, respectively. This increase is primarily due to the acquisitions during 2011 and 2012.

Changes in Financial Condition

Total investment property and equipment increased 25% or $50,546,495 during the nine months ended September 30, 2012. This increase was primarily due to the acquisition of 15 communities for a purchase price of $39,650,000. The Company also added approximately 220 rental units.

Securities available for sale increased 24% or $10,269,219 during the nine months ended September 30, 2012. The increase was due to purchases of securities available for sale of $14,258,362 and an increase in the unrealized gain of $5,116,523. These increases were partially offset by sales with an adjusted cost of $9,105,666.

Inventory of manufactured homes increased 24% or $2,431,013 during the nine months ended September 30, 2012. The Company is seeing increased activity in our communities and is optimistic about future sales and rental prospects.

Mortgages payable increased 18% or $16,652,052 during the nine months ended September 30, 2012. This increase was due to two new mortgages totaling $25,380,000 mortgage partially offset by principal repayments of $8,727,948, including the payoffs of our mortgages on Port Royal Village and Sandy Valley totaling approximately $6,646,000.

On April 10, 2012, the Company issued 1,075,000 shares of its preferred stock at an offering price of $25.292 per share, including accrued dividends, in an underwritten public offering. The Company received net proceeds from the offering of approximately $25.7 million and intends to use the net proceeds to purchase additional properties, including the acquisitions of the 14 communities which closed during the quarter, and for other general corporate purposes, including possible repayment of indebtedness.

On October 31, 2012, the Company issued 1,250,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock at an offering price of $25.50 per share, including accrued


dividends, in a registered direct placement.

The Company also raised $12,912,296 from the issuance of common stock in the DRIP during the nine months ended September 30, 2012, which included dividend reinvestments of $1,023,366. Dividends paid on the common stock for the nine months ended September 30, 2012 were $8,667,289 of which $1,023,366 was reinvested. On October 1, 2012, the Company declared a dividend of $.18 per share to be paid December 17, 2012 to common shareholders of record as of November 15, 2012.

Dividends paid on the preferred stock for the nine months ended September 30, 2012 was $2,865,650. This was net of $313,900 of accrued dividends on the newly issued preferred shares. On October 1, 2012, the Company declared a preferred dividend of $.515625 per share to be paid on December 17, 2012 to preferred shareholders of record as of November 15, 2012.

Liquidity And Capital Resources

The Company's principal liquidity demands have historically been, and are expected to continue to be, distributions to the Company's stockholders, acquisitions, capital improvements, development and expansions of properties, debt service, purchases of manufactured home inventory, investment in securities of other REITs and payments of expenses relating to real estate operations. The Company's ability to generate cash adequate to meet these demands is dependent primarily on income from its real estate investments and securities portfolio, the sale of real estate investments and securities, refinancing of mortgage debt, leveraging of real estate investments, availability of bank borrowings, proceeds from the DRIP, and access to the capital markets.

Current economic indicators show the US economy to be slowly improving. The affordability of our homes should enable the Company to perform well despite the challenging economy. While the recent recession has proven difficult, the manufactured housing community property type has been more stable than other commercial property types.

Net cash provided by operating activities amounted to $4,710,629 and $5,575,472 for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, the Company had cash of $4.4 million, securities available for sale of $53.6 million, $5 million available on its unsecured line of credit, and $8 million available on its revolving lines of credit for the financing of home sales and the purchase of inventory. The Company owns 55 properties, of which 24 are unencumbered. These marketable securities, non-mortgaged properties, and lines of credit provide the Company with additional liquidity.
The Company has been raising capital through its DRIP and through public offerings of its preferred stock.

The Company uses a variety of sources to fund its cash needs in addition to cash generated through operations. The Company may sell marketable securities, borrow on its lines of credit, finance and refinance its properties, or raise capital through the DRIP and capital markets. The Company believes that funds generated from these sources will provide sufficient funds to adequately meet its obligations over the next several years.


The Company has one mortgage with a balance of approximately $7,500,000 maturing in 2013. The Company is in the process of refinancing this mortgage.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Funds From Operations

Funds from Operations (FFO) is defined as net income excluding gains (or losses) from sales of depreciable assets, plus depreciation. FFO should be considered as a supplemental measure of operating performance used by real estate investment trusts (REITs). FFO excludes historical cost depreciation as an expense and may facilitate the comparison of REITs which have different cost basis. The items excluded from FFO are significant components in understanding and assessing the Company's financial performance. FFO (1) does not represent cash flow from operations as defined by generally accepted accounting principles; (2) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (3) is not an alternative to cash flow as a measure of liquidity. FFO, as calculated by the Company, may not be comparable to similarly entitled measures reported by other REITs.

The Company's FFO for the three and nine months ended September 30, 2012 and 2011 is calculated as follows:

                                 Three Months                  Nine Months
                              2012         2011             2012            2011

Net Income Attributable to                                               $2,187,270
 Common Shareholders         $161,138      $102,558         $2,308,837
Depreciation Expense        1,930,158     1,580,906          5,231,579    4,371,441
(Gain) Loss on Sales of                                                    (29,350)
  Depreciable Assets           10,368       (3,286)             21,209

FFO Attributable to Common $2,101,664 $1,680,178 $7,561,625 $6,529,361 Shareholders

The following are the cash flows provided (used) by operating, investing and financing activities for the nine months ended September 30, 2012 and 2011:

2012 2011

Operating Activities $4,710,629 $5,575,472 Investing Activities (53,042,876) (33,874,206) Financing Activities 43,974,882 30,090,057


Safe Harbor Statement

Statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Also, when we use any of the words "anticipate," "assume," "believe," "estimate," "expect," "intends," "plans," "seeks," "could," "may," or similar expressions, we are making forward-looking statements. These forward-looking statements are not guaranteed and are based on our current intentions and on our current expectations and assumptions. These statements, intentions, expectations and assumptions involve risks and uncertainties, some of which are beyond our control, which could cause actual results or events to differ materially from those we anticipate or project. Such risks and uncertainties include, but are not limited to, the following:

changes in the real estate market and general economic conditions;

the inherent risks associated with owning real estate, including local real estate market conditions, governing laws and regulations affecting manufactured housing communities and illiquidity of real estate investments;

increased competition in the geographic areas in which we own and operate manufactured housing communities;

our ability to continue to identify, negotiate and acquire manufactured housing communities and/or vacant land which may be developed into manufactured housing communities on terms favorable to us;

our ability to maintain rental rates and occupancy levels;

changes in market rates of interest;

our ability to repay debt financing obligations;

our ability to refinance amounts outstanding under our credit facilities at maturity on terms favorable to us;

our ability to comply with certain debt covenants;

the availability of other debt and equity financing alternatives;

continued ability to access the debt or equity markets;

the loss of any member of our management team;

our ability to maintain internal controls and processes to ensure all transactions are accounted for properly, all relevant disclosures and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected;

the ability of manufactured home buyers to obtain financing;

the level of repossessions by manufactured home lenders;

changes in federal or state tax rules or regulations that could have adverse tax consequences; and

our ability to qualify as a real estate investment trust for federal income tax purposes.

You should not place undue reliance on these forward-looking statements, as events described or implied in such statements may not occur. The forward-looking statements contained in this Form 10-Q speak only as of the date hereof and the Company expressly disclaims any obligation to publicly update or revise any forward-looking statements whether as


a result of new information, future events, or otherwise.

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