Form 10-K



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K


[ X ]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007


[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period ____________________ to _____________________


Commission File Number 001-12690


UMH Properties, Inc.

(Exact name of registrant as specified in its charter)


Maryland     22-1890929

(State or other jurisdiction of     (I.R.S. Employer

incorporation or organization)     identification number)


3499 Route 9, Suite 3C, Freehold, New Jersey     07728

(Address of principal executive offices)    (Zip code)


Registrant's telephone number, including area code (732) 577-9997


Securities registered pursuant to Section 12(b) of the Act:    None

Securities registered pursuant to Section 12(g) of the Act: Common Stock $.10 par value


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.           Yes    X    No   


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.           Yes    X    No  


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  X    Yes           No


Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    X   .


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer  _______            Accelerated filer     X                  Non-accelerated filer  _______  


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

         Yes    X    No


Based upon the assumption that directors and executive officers of the registrant are not affiliates of the registrant, the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant at June 30, 2007 was $149,887,083.  Presuming that such directors and executive officers are affiliates of the registrant, the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant at June 30, 2007 was $122,056,136.


The number of shares outstanding of issuer's common stock as of February 29, 2008 was 10,768,099 shares.


Documents Incorporated by Reference:

-

Exhibits incorporated by reference are listed in Part IV; Item 15 (a) (3).



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TABLE OF CONTENTS


PART I

3

Item 1 – Business

3

Item 1A – Risk Factors

5

Item 1B – Unresolved Staff Comments

10

Item 2 – Properties

10

Item 3 – Legal Proceedings

14

Item 4 – Submission of Matters To a Vote of Security Holders

14

PART II

15

Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6 – Selected Financial Data

17

Item 7 –  Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 7A – Quantitative and Qualitative Disclosures About Market Risk

26

Item 8 – Financial Statements and Supplementary Data

27

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

28

Item 9A – Controls and Procedures

28

Item 9B – Other Information

30

PART III

31

Item 10 – Directors, Executive Officers and Corporate Governance

31

Item 11 – Executive Compensation

32

Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

38

Item 13 – Certain Relationships and Related Transactions, and Director Independence

40

Item 14 – Principal Accounting Fees and Services

40

PART IV

42

Item 15 – Exhibits, Financial Statement Schedules

42

SIGNATURES

73




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PART I


Item 1 – Business


General Development of Business


In this Form 10-K, “we”, “us”, “our”, or “the Company”, refers to UMH Properties, Inc., together with its predecessors and subsidiaries, unless the context requires otherwise.


United Mobile Homes, Inc. changed its name to UMH Properties, Inc. (the Company). The name change was unanimously approved by the Company’s Board of Directors and effected by the filing of Articles of Amendment to the Company’s charter with the State Department of Assessments and Taxation of Maryland to be effective on April 1, 2006. In accordance with Section 2-605 of the Maryland General Corporation Law and the Company’s organizational documents, no stockholder vote was required or obtained. No other changes were made to the Company’s charter.  The Company’s common stock will continue to be traded on the American Stock Exchange under the ticker symbol “UMH”, but under the new CUSIP number 903002103.


The Company owns and operates twenty-eight manufactured home communities containing approximately 6,800 sites.  These communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee.


Effective January 1, 1992, the Company elected to be taxed as a real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code (the Code), and intends to maintain its qualification as a REIT in the future.  As a qualified REIT, with limited exceptions, the Company will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders.  For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code.  The Company is subject to franchise taxes in some of the states in which the Company owns property.


The Company was incorporated in the state of New Jersey in 1968.  On September 29, 2003, the Company changed its state of incorporation from New Jersey to Maryland.  The reincorporation was approved by the Company’s shareholders at the Company’s annual meeting on August 14, 2003.


Background


Monmouth Capital Corporation, a publicly-owned Small Business Investment Corporation, that had owned approximately 66% of the Company’s stock, spun off to its shareholders in a registered distribution three shares of UMH Properties, Inc. for each share of Monmouth Capital Corporation.  The Company in 1984 and 1985 issued additional shares through rights offerings.  The Company has been in operation for forty years, the last twenty-two of which have been as a publicly-owned corporation.


Narrative Description of Business


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 wholly-owned taxable REIT subsidiary, sells homes to residents and prospective residents of our communities.


A manufactured home community is designed to accommodate detached, single-family manufactured homes.  These manufactured homes are produced off-site by manufacturers and installed on sites within the community. These homes are often improved with the addition of features constructed on site, including garages, screened rooms and carports. Manufactured homes are available in a variety of designs and floor plans, offering many amenities and custom options.  Manufactured homes, once located, are rarely transported to another site; typically, a manufactured home remains on site and is sold by its owner to a subsequent occupant.  This transaction is commonly handled through a broker in the same manner that a more traditional single-family residence is sold.  Each owner of a manufactured home leases the site on which the home is located from the Company.



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Manufactured homes are being accepted by the public as a viable and economically attractive alternative to common stick-built single-family housing.  The affordability of the modern manufactured home makes it a very attractive housing alternative.  Depending on the region of the country, construction cost per square foot for a new manufactured home averages anywhere from 10 to 45 percent less than a comparable site-built home, excluding the cost of land.  This is due to a number of factors, including volume purchase discounts and inventory control of construction materials and control of all aspects of the construction process, which is generally a more efficient and stream-lined process as compared to a site-built home.


Modern residential land lease communities are similar to typical residential subdivisions containing central entrances, paved well-lit streets, curbs and gutters.  The size of a modern manufactured home community is limited, as are other residential communities, by factors such as geography, topography, and funds available for development.  Generally, modern manufactured home communities contain buildings for recreation, green areas, and other common area facilities, which, as distinguished from resident owned manufactured homes, are the property of the community owner.  In addition to such general improvements, certain manufactured home communities include recreational improvements such as swimming pools, tennis courts and playgrounds.  Municipal water and sewer services are available to some manufactured home communities, while other communities supply these facilities on site.  Therefore, the owner of a home in our communities leases from us not only the site on which the home is located, but also the physical community framework, and acquires the right to utilize the community common areas and amenities.


Typically, the leases are on a month-to-month or year-to-year basis, renewable upon the consent of both parties.  The community manager interviews prospective residents, ensures compliance with community regulations, maintains public areas and community facilities and is responsible for the overall appearance of the community.  The manufactured home community, once fully occupied, tends to achieve a stable rate of occupancy.  The cost and effort in moving a home once it is located in a community encourages the owner of the manufactured home to resell the manufactured home rather than to remove it from the community.  This ability to produce relatively predictable income, together with the location of the community, its condition and its appearance, are factors in the long-term appreciation of the community.


Inherent in the operation of a manufactured home community is the development, redevelopment, and expansion of our communities.  Effective April 1, 2001, the Company, through its wholly-owned taxable REIT subsidiary, UMH Sales and Finance, Inc. (S&F), began to conduct manufactured home sales, and financing of these sales, in our communities.  S&F was established to potentially enhance the value of our communities.  The home sales business is operated like other homebuilders with sales centers, model homes, an inventory of completed homes and the ability to supply custom designed homes based upon the requirements of the new homeowners.


The Company had operated as part of a group of three public companies (all REITs) which included Monmouth Real Estate Investment Corporation (MREIC) and Monmouth Capital Corporation (MCC) (the affiliated companies).  On July 31, 2007, MREIC and MCC completed a strategic combination whereby a wholly-owned subsidiary of MREIC merged with and into MCC, and MCC survived as a wholly-owned subsidiary of MREIC.  The Company continues to operate in conjunction with MREIC.  MREIC invests in long-term net-leased industrial properties to investment grade tenants.  Prior to the merger of MREIC and MCC, some general and administrative expenses were allocated among the three affiliated companies based on use or services provided.  Allocations of salaries and benefits were made among the affiliated companies based on the amount of the employees’ time dedicated to each affiliated company.  Subsequent to the merger, shared expenses are allocated between the Company and MREIC.  The Company currently has approximately 100 employees.    


Additional information about the Company can be found on the Company’s website which is located at www.umh.com.  The Company’s filings with the Securities and Exchange Commission are made available through a link on the Company’s website or by contacting Investor Relations.


Investment and Other Policies of the Company


The Company may invest in improved and unimproved real property and may develop unimproved real property.  Such properties may be located throughout the United States.  In the past, it has concentrated on the northeast.



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On March 10, 2006, the Company acquired (at auction) Weatherly Estates I, a 270-space manufactured home community in Lebanon, Tennessee, from Affordable Residential Communities Inc., an unrelated entity.  The total purchase price was approximately $5,200,000.  The Company paid approximately $600,000 in cash and used approximately $4,600,000 of its line of credit from PNC Bank.


During 2005, the Company acquired 185 acres of land in the Town and Village of Coxsackie, New York, and 67 acres of land in the City of Vineland, New Jersey adjacent to our existing community, Fairview Manor Manufactured Home Community.  These properties will be used to develop new communities for the Company.


The Company has no restrictions on how it finances new manufactured home communities.  It may finance communities by purchase money mortgages or other financing, including first liens, wraparound mortgages or subordinated indebtedness.  In connection with its ongoing activities, the Company may issue notes, mortgages or other senior securities.  The Company intends to use both secured and unsecured lines of credit.


The Company may issue securities for property, however, this has not occurred to date, and it may repurchase or reacquire its shares from time to time if, in the opinion of the Board of Directors, such acquisition is advantageous to the Company.


The Company also invests in both debt and equity securities of other REITs. The Company from time to time may purchase these securities on margin when the interest and dividend yields exceed the cost of funds.  The securities portfolio, to the extent not pledged to secure borrowing, provides the Company with liquidity and additional income.  Such securities are subject to risk arising from adverse changes in market rates and prices, primarily interest rate risk relating to debt securities and equity price risk relating to equity securities.  From time to time, the Company may use derivative instruments to mitigate interest rate risk.  At December 31, 2007 and 2006, the Company had $23,523,231 and $17,908,595, respectively, of securities available for sale.  Included in these securities are Preferred Stock and Debt securities of $2,423,588 and $6,000,000, respectively at December 31, 2007 and $6,524,750 and $6,000,000 respectively, at December 31, 2006.  The unrealized net (loss) gain on securities available for sale at December 31, 2007 and 2006 amounted to ($1,042,104) and $384,890, respectively.


Property Maintenance and Improvement Policies


It is the policy of the Company to properly maintain, modernize, expand and make improvements to its properties when required.  The Company anticipates that renovation expenditures with respect to its present properties during 2008 will be consistent with 2007 expenditures, which amounted to approximately $2,500,000.  It is the policy of the Company to maintain adequate insurance coverage on all of its properties; and, in the opinion of the Company, all of its properties are adequately insured.


Number of Employees


On March 1, 2008, the Company had approximately 100 employees, including Officers.  During the year, the Company hires approximately 20 part-time and full-time temporary employees as lifeguards, grounds keepers and for emergency repairs.


Item 1A – Risk Factors


Real Estate Industry and Competition Risks


The Company’s investments are subject to the risks generally associated with the ownership of real property, including the uncertainty of cash flow to meet fixed obligations, adverse changes in national economic conditions, changes in the relative demand (and thus the relative price) of the Company’s real estate investments when compared to other investments, adverse local market conditions due to changes in general or local economic conditions or neighborhood values, changes in interest rates and in the availability of mortgage funds, costs and terms of mortgage funds, the financial conditions of residents and sellers of properties, changes in real estate tax rates and other operating expenses (including corrections of potential environmental issues as well as more stringent governmental regulations regarding the environment), governmental rules and fiscal policies including possible



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proposals for rent controls, as well as expenses resulting from acts of God, uninsured losses and other factors which are beyond the control of the Company.  The Company’s investments are primarily in rental properties and are subject to the risk or inability to attract or retain residents with a consequent decline in rental income as a result of adverse changes in local real estate markets or other factors.


The real estate business is highly competitive.  The Company competes for manufactured home community investments with numerous other real estate entities, such as individuals, corporations, REITs and other enterprises engaged in real estate activities, possibly including certain affiliates of the Company.  In many cases, the competing concerns may be larger and better financed than the Company, making it difficult for the Company to secure new manufactured home community investments.  Competition among private and institutional purchasers of manufactured home community investments has increased substantially in recent years, with resulting increases in the purchase price paid for manufactured home communities and consequent higher fixed costs.


Governmental Regulations  


The Company is subject to significant regulation that inhibits our activities and may increase our costs.  Local zoning and use laws, environmental statutes and other governmental requirements may restrict expansion, rehabilitation and reconstruction activities.  These regulations may prevent the Company from taking advantage of economic opportunities.  Legislation such as the Americans with Disabilities Act may require the Company to modify its properties.  Future legislation may impose additional requirements.  No prediction can be made as to what requirements may be enacted or what changes may be implemented to existing legislation.


Rent control affects only two of the Company’s manufactured home communities which are in New Jersey and has resulted in a slower growth of earnings from these properties.


Environmental Liability Risks


Environmental liabilities could affect our profitability.  Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate or have owned or operated.  They may be liable to the government or to third parties for property damage, investigation costs and cleanup costs.  Contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral.  There is no way of determining at this time the magnitude of any potential liability to which the Company may be subject arising out of unknown environmental conditions or violations with respect to the properties it owns.  Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, or released from, the property.  A conveyance of the property, therefore, does not relieve the owner or operator from liability.  The Company is not aware of any environmental liabilities relating to its properties which would have a material adverse effect on its business, assets, or results of operations.  However, no assurance can be given that environmental liabilities will not arise in the future.


The Company owns and operates 13 manufactured home communities which either have their own wastewater treatment facility, water distribution system, or both.  At these locations, the Company is subject to compliance of monthly, quarterly and yearly testing for contaminants as outlined by the individual state’s Department of Environmental Protection Agencies.


Currently, the Company is not subject to radon or asbestos monitoring requirements.


Insurance Considerations


The Company generally maintains insurance policies related to its business, including casualty, general liability and other policies covering business operations, employees and assets.  However, the Company may be required to bear all losses that are not adequately covered by insurance.  In addition, there are certain losses that are not generally insured because it is not economically feasible to insure against them, including losses due to riots or acts of war.  If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties and, in the case of debt, which is with recourse to us, we would remain obligated for any



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mortgage debt or other financial obligations related to the properties.  Although management believes that the Company’s insurance programs are adequate, no assurance can be given that the Company will not incur losses in excess of its insurance coverage, or that the Company will be able to obtain insurance in the future at acceptable levels and reasonable cost.


Financing Risks


The Company faces risks generally associated with our debt.  We finance a portion of our investments in properties and marketable securities through debt.  This debt creates risks, including:  

·

rising interest rates on our floating rate debt;


·

failure to repay or refinance existing debt as it matures, which may result in forced disposition of assets on disadvantageous terms;


·

refinancing terms less favorable than the terms of existing debt; and


·

failure to meet required payments of principal and/or interest.


We face risks associated with the use of debt to fund acquisitions, including refinancing risk.  We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest.   In addition, if we mortgage one or more of our properties to secure payment of indebtedness and we are unable to meet mortgage payments, then the property could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value.  A foreclosure of one or more of our properties could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.  

We face risks related to “balloon payments.”  Certain of our mortgages will have significant outstanding principal balances on their maturity dates, commonly known as “balloon payments.”  There can be no assurance whether we will be able to refinance such balloon payments on the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay dividends to investors.

We face risks associated with our dependence on external sources of capital.  In order to qualify as a REIT, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income, and we are subject to tax on our income to the extent it is not distributed.  Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations.  As a result, to fund capital needs, we rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all.  Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the market’s perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our capital stock.  Additional debt financing may substantially increase our debt-to-total capitalization ratio.  Additional common equity financing may dilute the holdings of our current common stockholders.

A lack of any limitation on our debt could result in our becoming more highly leveraged.  Our governing documents do not limit the amount of indebtedness we may incur.  Accordingly, our Board of Directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT.  We might become more highly leveraged as a result, and our financial condition and cash available for distribution to stockholders might be negatively affected and the risk of default on our indebtedness could increase.

Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.  The terms of our various credit agreements and other indebtedness require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage.  These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our



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payment obligations.  If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flow and our financial condition would be adversely affected.

Amendment of Business Policies


The Company may amend our business policies without your approval.  The Board of Directors determines the growth, investment, financing, capitalization, borrowing, REIT status, operating and distribution policies.  Although the Board of Directors has no present intention to amend or revise any of these policies, these policies may be amended or revised without notice to shareholders.  Accordingly, shareholders may not have control over changes in Company policies.  Management cannot assure shareholders that changes in our policies will serve fully the interests of all shareholders.


Other Risks


The market value of our Common Stock could decrease based on the Company’s performance and market perception and conditions. The market value of the Company’s Common Stock may be based primarily upon the market's perception of the Company’s growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of the Company’s underlying assets. The market price of the Company’s Common Stock is influenced by the dividend on the Company’s Common Stock relative to market interest rates. Rising interest rates may lead potential buyers of the Company’s Common Stock to expect a higher dividend rate, which would adversely affect the market price of our Common Stock. In addition, rising interest rates would result in increased expense, thereby adversely affecting cash flow and the Company’s ability to service our indebtedness and pay distributions.


There are restrictions on the transfer of the Company’s Common Stock. To maintain the Company’s qualification as a REIT under the Internal Revenue Code of 1986 (the Code), no more than 50% in value of the Company’s outstanding capital stock may be owned, actually or by attribution, by five or fewer individuals, as defined in the Code to also include certain entities, during the last half of a taxable year. Accordingly, the Company’s charter and bylaws contain provisions restricting the transfer of the Company’s Common Stock.


The Company’s earnings are dependent, in part, upon the performance of our investment portfolio. As permitted by the Code, management invests in and owns securities of other real estate investment trusts. To the extent that the value of those investments declines or those investments do not provide a return, the Company’s earnings could be adversely affected.


To produce new rental revenue and to upgrade our communities, the Company sells homes to customers in our communities at competitive prices and finances these home sales.  We allow banks and outside finance companies the first opportunity to finance these sales.  There is a risk of default in financing these sales.  These loans may have higher default rates than we anticipate, and demand for consumer financing may not be as great as we anticipate or may decline.  Additionally, there are many regulations pertaining to our home sales and financing activities.  There are significant consumer protection laws and the regulatory framework may change in a manner which may adversely affect our operating results. The regulatory environment and associated consumer finance laws create a risk of greater liability from our home sales and financing activities and could subject us to additional litigation.  We are also dependent on licenses granted by state and other regulatory authorities, which may be withdrawn or which may not be renewed and which could have an adverse impact on our ability to continue with our home sales and financing activities.  


The Company is subject to restrictions that may impede management’s ability to effect a change in control. Certain provisions contained in the Company’s charter and bylaws, and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and thereby inhibit a change in control.  These provisions include the following:


·

Our charter provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a "staggered board." By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect



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of keeping the current members of our Board of Directors in control for a longer period of time than stockholders may desire.


·

Our charter generally limits any holder from acquiring more than 9.8% (in value or in number, whichever is more restrictive) of our outstanding equity stock (defined as all of our classes of capital stock, except our excess stock). While this provision is intended to assure our ability to remain a qualified REIT for Federal income tax purposes, the ownership limit may also limit the opportunity for stockholders to receive a premium for their shares of common stock that might otherwise exist if an investor were attempting to assemble a block of shares in excess of 9.8% of the outstanding shares of equity stock or otherwise effect a change in control.  

·

The request of the holders of a majority or more of our common stock is necessary for stockholders to call a special meeting.  We also require advance notice by common stockholders for the nomination of directors or proposals of business to be considered at a meeting of stockholders.

·

Our Board of Directors may authorize and issue securities without stockholder approval.  Under our Charter, the board has the power to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the Board of Directors may determine.  The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.

Maryland business statutes may limit the ability of a third party to acquire control of us.  Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations.  The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition.  Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director.  Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.

The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an “interested stockholder” or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met.  An interested stockholder is generally a person owning or controlling, directly or indirectly, 10 percent or more of the voting power of the outstanding stock of the Maryland corporation.  In our Articles of Incorporation, we have expressly elected that the Maryland Business Combination Act not govern or apply to any transaction with Monmouth Real Estate Investment Corporation., a Maryland corporation, or Monmouth Capital Corporation, a New Jersey corporation.  

The Company may fail to qualify as a REIT.  If the Company fails to qualify as a REIT, the Company will not be allowed to deduct distributions to shareholders in computing our taxable income and will be subject to Federal income tax, including any applicable alternative minimum tax, at regular corporate rates. In addition, the Company might be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantly the cash flow available for distribution to shareholders and for debt service.  


Furthermore, the Company would no longer be required to make any distributions to the Company’s shareholders as a condition to REIT qualification.  Any distributions to stockholders would be taxable as ordinary



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income to the extent of our current and accumulated earnings and profits, although such dividend distributions would be subject to a top federal tax rate of 15% through 2010.  Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Code.

To qualify as a REIT, and to continue to qualify as a REIT, the Company must comply with certain highly technical and complex requirements. The Company cannot be certain it has complied, and will always be able to comply, with these requirements because there are few judicial and administrative interpretation of these provisions.  In addition, facts and circumstances that may be beyond the Company’s control may affect the Company’s ability to continue to qualify as a REIT.  The Company cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company’s qualification as a REIT or with respect to the Federal income tax consequences of qualification.  The Company believes that it has qualified as a REIT since it adopted REIT status in 1992 and intends to continue to qualify as a REIT.  However, the Company cannot assure you that the Company is qualified or will remain qualified.


There is a risk of changes in the tax law applicable to REITs.  Because the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted.  Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.

The Company may be unable to comply with the strict income distribution requirements applicable to REITs.  To maintain qualification as a REIT under the Code, a REIT must annually distribute to its shareholders at least 90% of its REIT taxable income, excluding the dividends paid deduction and net capital gains.  This requirement limits our ability to accumulate capital.  We may not have sufficient cash or other liquid assets to meet the distribution requirements.  Difficulties in meeting the distribution requirements might arise due to competing demands for our funds or to timing differences between tax reporting and cash receipts and disbursements, because income may have to be reported before cash is received, because expenses may have to be paid before a deduction is allowed or because deductions may be disallowed or limited, or the Internal Revenue Service may make a determination that adjusts reported income.  In those situations, we might be required to borrow funds or sell properties on adverse terms in order to meet the distribution requirements and interest and penalties could apply which could adversely affect our financial condition.  If we fail to make a required distribution, we would cease to be taxed as a REIT.

Notwithstanding the Company’s status as a REIT, the Company is subject to various Federal, state and local taxes on our income and property. For example, the Company will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains, provided, however, that properly designated undistributed capital gains will effectively avoid taxation at the stockholder level. The Company may also have to pay some state income or franchise taxes because not all states treat REITs in the same manner as they are treated for Federal income tax purposes.


Item 1B – Unresolved Staff Comments


None


Item 2 – Properties


UMH Properties, Inc. is engaged in the ownership and operation of manufactured home communities located in New Jersey, New York, Ohio, Pennsylvania and Tennessee.  The Company owns twenty-eight manufactured home communities containing approximately 6,800 sites.  The following is a brief description of the properties owned by the Company.  There is a long-term trend toward larger manufactured homes.  Manufactured home communities designed for older manufactured homes must be modified to accommodate modern wider and longer manufactured homes.  These changes may decrease the number of homes that may be accommodated in a manufactured home community.  The rents collectible from the land ultimately depend on the value of the home and land.  Therefore, fewer but more expensive homes can actually produce the same or greater rents.  For this reason, the number of sites operated by the Company is subject to change, and the number of sites listed is always an approximate number.



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Number of

Occupied Sites at

Monthly Rent Per Site at

Name of Community

Sites

December 31, 2007

December 31, 2007

    

Allentown

398

394

$331

4912 Raleigh-Millington Road

   

Memphis, TN  38128

   
    

Brookview Village

133

106

$370

Route 9N

   

Greenfield Center, NY  12833

   
    

Cedarcrest

283

282

$457

1976 North East Avenue

   

Vineland, NJ  08360

   
    

Cranberry Village

200

173

$427

201 North Court

   

Cranberry Township, PA  16066

   
    

Cross Keys Village

133

98

$292

Old Sixth Avenue Road, RD #1

   

Duncansville, PA  16635

   
    

D & R Village

240

218

$410

Route 146, RD 13

   

Clifton Park, NY  12065

   
    

Fairview Manor

317

317

$461

2110 Mays Landing Road

   

Millville, NJ  08332

   
    

Forest Park Village

252

191

$381

724 Slate Avenue

   

Cranberry Township, PA  16066

   
    

Heather Highlands

404

275

$283

109 S. Main Street

   

Pittston, PA  18640

   
    

Highland Estates

327

289

$456

60 Old Route 22

   

Kutztown, PA  19530

   
    

Kinnebrook

218

198

$430

201 Route 17B

   

Monticello, NY  12701

   
    

Lake Sherman Village

238

159

$331

7227 Beth Avenue, SW

   

Navarre, OH  44662

   
    

Laurel  Woods

218

164

$260

1943 St. Joseph Street

   

Cresson, PA  16630

   
    



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Number of

Occupied Sites at

Monthly Rent Per Site at

Name of Community

Sites

December 31, 2007

December 31, 2007

    

Memphis Mobile City

156

154

$299

3894 N. Thomas Street

   

Memphis, TN  38127

   
    

Oxford Village

224

223

$474

2 Dolinger Drive

   

West Grove, PA  19390

   
    

Pine Ridge Village/Pine Manor

183

140

$394

147 Amy Drive

   

Carlisle, PA  17013

   
    

Pine Valley Estates

217

139

$290

700 Pine Valley Estates

   

Apollo, PA  15613

   
    

Port Royal Village

462

276

$312

400 Patterson Lane

   

Belle Vernon, PA  15012

   
    

River Valley Estates

231

200

$277

2066 Victory Road

   

Marion, OH  43302

   
    

Sandy Valley Estates

364

273

$330

801 First, Route #2

   

Magnolia, OH  44643

   
    

Somerset Estates/Whispering Pines

248

197

$215

1873 Husband Rd

   

Somerset, PA  15501

   
    

Southwind Village

250

250

$321

435 E. Veterans Highway

   

Jackson, NJ  08527

   
    

Spreading Oaks Village

151

134

$252

7140-29 Selby Road

   

Athens, OH  45701

   
    

Waterfalls Village

202

171

$416

3450 Howard Road

   

Hamburg, NY  14075

   
    

Weatherly Estates

270

183

$352

271 Weatherly Drive

   

Lebanon, TN  37087

   
    




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Number of

Occupied Sites at

Monthly Rent Per Site at

Name of Community

Sites

December 31, 2007

December 31, 2007

    

Woodland Manor

149

72

$286

338 County Route 11, Lot 165

   

West Monroe, NY  13167

   
    

Woodlawn Village

157

152

$575

Route 35

   

Eatontown, NJ  07724

   
    

Wood Valley

161

100

$280

1493 N. Whetstone River Road

   

Caledonia, OH  43314

   
    


The Company actively seeks to have older homes removed from the community and replaced by newer modern homes.  During 2007, the Company sold approximately 240 newer homes into our communities.  However, the total number of occupied sites only increased by 60 sites.  Approximately 180 homes left the communities for various reasons, including demolished as obsolete.  Overall occupancy declined from 82% at December 31, 2006 to 81% at December 31, 2007 primarily due to new expansion sites placed in service in the fourth quarter.  The ability of manufactured home communities to be renewed and upgraded is believed to be a positive factor.


Residents generally rent sites on a month-to-month basis.  Some residents have one-year leases.  Southwind Village and Woodlawn Village (both in New Jersey) are the only communities subject to local rent control laws.


In connection with the operation of its communities, the Company operates approximately 560 rental units.  These are homes owned by the Company and rented to residents.  The Company engages in the rental of manufactured homes primarily in areas where the communities have existing vacancies.  The rental homes produce income on both the home and for the site which might otherwise be non-income producing.  The Company sells the older rental homes when the opportunity arises.


The Company has approximately 1,200 sites in various stages of engineering/construction.  Due to the difficulties involved in the approval and construction process, it is difficult to predict the number of sites which will be completed in a given year.


Significant Properties


The Company operates approximately $116,000,000 (at original cost) in manufactured home properties.  These consist of 28 separate manufactured home communities and related equipment and improvements.  No one community constitutes more than 10% of the total assets of the Company.  Port Royal Village with 462 sites, Heather Highlands with 404 sites, Allentown with 398 sites, Sandy Valley Estates with 364 sites, Highland Estates with 327 sites, Fairview Manor with 317 sites, and Cedarcrest with 283 sites, are the larger properties.


Mortgages on Properties


The Company has mortgages on various properties.  The maturity dates of these mortgages range from the year 2008 to 2019.  Interest varies from fixed rates of 4.625% to 8.04% and variable rates of prime plus 1/2% to LIBOR plus 1.55% to 1.75%.  The aggregate balances of these mortgages total $61,749,700 at December 31, 2007.  (For additional information, see Part IV, Item 15(a) (1) (vi), Note 5 of the Notes to Consolidated Financial Statements – Loans and Mortgages Payable).




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Item 3 – Legal Proceedings


Legal proceedings are incorporated herein by reference and filed as Part IV, Item 15(a)(1)(vi), Note 12 of the Notes to Consolidated Financial Statements – Contingencies and Legal Matters.


Item 4 – Submission of Matters To a Vote of Security Holders


No matters were submitted during the fourth quarter of 2007 to a vote of security holders through the solicitation of proxies or otherwise.




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PART II


Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


The Company’s shares are traded on the American Stock Exchange (symbol UMH).  The per share range of high and low quotes for the Company’s stock and distributions paid to shareholders for each quarter of the last two years are as follows:


 

2007

 

      2006

 

HIGH

LOW

Distribution

 

HIGH

LOW

Distribution

        

First Quarter

$16.50

$14.30

$ .25

 

$16.00

$14.88

$ .245

Second Quarter

15.40

14.00

.25

 

15.31

14.55

.245

Third Quarter

14.31

11.26

.25

 

15.75

15.00

.245

Fourth Quarter

14.00

10.42

   .25

 

16.20

15.03

.250

   

$1.00

   

$.985

        

On March 3, 2008, the closing price of the Company’s stock was $11.16.


As of December 31, 2007, there were approximately 802 shareholders of the Company’s common stock based on the number of record owners.


For the years ended December 31, 2007 and 2006, total distributions paid by the Company amounted to $10,543,602 or $1.00 per share ($.4903 taxed as ordinary income and $.5097 as a return of capital) and $9,957,831 or $.985 per share ($.6843 taxed as ordinary income, $.1097 taxed as a long-term capital gain and $.1910 as a return of capital), respectively.


It is the Company’s intention to continue distributing quarterly dividends.  On January 16, 2008, the Company declared a cash dividend of $.25 per share to be paid on March 17, 2008 to shareholders of record February 15, 2008.  Future dividend policy will depend on the Company’s earnings, capital requirements, REIT requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors.  


Securities Authorized for Issuance Under Equity Compensation Plans


The Company has a Stock Option Plan (the 2003 Plan) authorizing the grant to officers and key employees of options to purchase up to 1,500,000 shares of common stock.  This Plan replaced the Company’s 1994 Stock Option Plan which, pursuant to its terms, terminated December 31, 2003.  See Note 6 in the Notes to the Consolidated Financial Statements for a description of the plans.


The following table summarizes information, as of December 31, 2007, relating to equity compensation plans of the Company (including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for issuance.



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Plan Category

 


Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights

(a)

 


Weighted-average Exercise Price of Outstanding Options, Warrants and Rights

(b)

 

Number of Securities Remaining Available for Future Issuance

(c)

       

Equity Compensation Plans Approved by Security Holders

 



426,000

 



$15.10

 



1,100,188

       

Equity Compensation Plans not Approved by Security Holders

 



     N/A

 



      N/A

 



          N/A

       

Total

 

426,000

 

$15.10

 

1,100,188

       

 

Comparative Stock Performance


The line graph compares the total return of the Company’s common stock for the last five years to the FTSE NAREIT ALL REIT Total Return Index published by the National Association of Real Estate Investment Trust (NAREIT) and to the S&P 500 Index for the same period.  The total return reflects stock price appreciation and dividend reinvestment for all three comparative indices.  The information herein has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed.



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Item 6 – Selected Financial Data


The following table sets forth selected financial and other information for the Company as of and for each of the years in the five year period ended December 31, 2007.  This table should be read in conjunction with all of the financial statements and notes thereto included elsewhere herein.


 

December 31,

 

2007

2006

2005

2004

2003

    

Operating Data:

     
      

  Total Revenues

$38,840,701

$42,644,610

$39,339,573

$34,357,882

$33,790,503

  Total Expenses

36,307,278

36,962,736

32,392,720

26,176,771

25,328,860

  Gain on Sales of Investment

     

    Property and Equipment

99,318

158,403

43,489

20,638

55,888

  Net Income

2,632,741

5,840,277

6,990,342

8,201,749

8,517,531

  Net Income Per Share -

     

    Basic

.25

.58

.74

.95

1.08

    Diluted

.25

.58

.74

.95

1.07

Cash Flow Data:

     
      

  Net Cash Provided (Used)  by:

  Operating Activities


$2,766,606


$4,161,938


$3,034,698


$5,115,754


$4,420,150

  Investing Activities

(21,089,748)

(2,591,532)

(13,415,488)

(2,398,003)

326,610

  Financing Activities

18,540,091

(4,120,735)

6,161,334

2,812,190

(3,840,868)

Balance Sheet Data:

     
      

  Total Assets

$136,503,463

$115,740,444

$114,782,535

$103,164,988

$94,310,212

  Mortgages Payable

61,749,700

46,817,633

48,706,241

50,501,243

44,222,675

  Shareholders’ Equity

53,995,133

57,640,419

54,839,324

48,804,743

38,575,404

Other Information:

     
      

  Average Number of

     

    Shares Outstanding

10,535,162

10,093,546

9,473,155

8,598,686

7,858,888

  Funds from

     

    Operations (1)

$6,191,659

$9,097,444

$10,300,749

$11,355,784

$11,370,712

  Cash Dividends

     

    Per Share

1.00

.985

.9775

.9450

.9050

      

 (1) 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 trust (REITs).  FFO excludes historical cost depreciation as an expense and may facilitate the comparison of REITs which have different cost bases.  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.



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The Company’s FFO is calculated as follows:


 

2007

 

2006

 

2005

 

2004

 

2003

      

Net Income

$2,632,741

 

$5,840,277

 

$6,990,342

 

$8,201,749

 

$8,517,531

Gain on Sales of

  Depreciable Assets


(99,318)

 


(158,403)

 


(43,489)

 


(20,638)

 


(55,888)

Depreciation Expense

3,658,236

 

3,415,570

 

3,353,896

 

3,174,673

 

2,909,069

          

FFO

$6,191,659

 

$9,097,444

 

$10,300,749

 

$11,355,784

 

$11,370,712

          

 

Item 7 –  Management’s Discussion and Analysis of Financial Condition and Results of Operations


Safe Harbor Statement


Statements contained in this Form 10-K, including the documents that are incorporated by reference, 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,” “intend,” or similar expressions, we are making forward-looking statements.  These forward-looking statements are not guaranteed.  They reflect the Company’s current views with respect to future events and finance performance, but are based upon current assumptions regarding the Company’s operations, future results and prospects, and are subject to many uncertainties and factors, some of which are beyond our control, relating to the Company’s operations and business environment which could cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements.  


Such factors include, but are not limited to, the following:  changes in the real estate market and general economic climate; increased competition in the geographic areas in which the Company owns and operates manufactured housing communities; changes in government laws and regulations affecting manufactured housing communities; the ability of the Company 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 the Company; the ability to maintain rental rates and occupancy levels; competitive market forces; changes in market rates of interest; our ability to repay debt financing obligations; our ability to comply with certain debt covenants; continued ability to access the debt or equity markets; the availability of other debt and equity financing alternatives; 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; changes in federal or state tax rules or regulations that could have adverse tax consequences; our ability to qualify as a real estate investment trust for federal income tax purposes; the ability of manufactured home buyers to obtain financing; the level of repossessions by manufactured home lenders; and those risks and uncertainties referenced under the heading "Risk Factors" contained in this Form 10-K and the Company's filings with the Securities and Exchange Commission.  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-K 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.


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 elsewhere herein.


The Company is a real estate investment trust (REIT).  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.  The Company owns twenty-eight communities containing approximately 6,800 sites.  



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These communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee.  The Company also invests in debt and equity securities of other REITs.


During 2006, the Company acquired (at auction) Weatherly Estates I, a 270-space manufactured home community in Lebanon, Tennessee.  In many of our communities, the Company has vacant land.  The Company continues to expand these communities and hopes to develop new manufactured home communities on these properties.


The Company also holds a portfolio of securities of other REITs and public companies in the manufactured housing sector with a fair value of $23,523,231 at December 31, 2007.  The Company invests in REIT securities on margin from time to time when the Company can achieve an adequate yield spread and when suitable acquisitions of real property cannot be found.  At December 31, 2007, the Company’s portfolio consisted of 12% preferred stocks, 63% common stocks and 25% debentures.  The Company’s weighted-average yield on the securities portfolio was approximately 8.4% at December 31, 2007.  The REIT securities portfolio provides the Company with liquidity and additional income until suitable acquisitions of real property are found.


The Company’s revenue primarily consists of rental and related income from the operation of its manufactured home communities.  Revenues also include sales of manufactured homes, interest and dividend income and gain on securities transactions, net.  Total revenues decreased by approximately 9% for the year ended December 31, 2007 as compared to the year ended December 31, 2006.  This was primarily due to a decrease in sales of manufactured homes of approximately 20% for the year ended December 31, 2007 as compared to the year ended December 31, 2006. Sales in 2006 included sales into our expansions at Fairview Manor and Highland Estates, which sold out during 2006.  Additionally, the (loss) gain on securities transactions, net decreased from a gain of $266,847 for the year ended December 31, 2006 to a loss of $1,398,377 for the year ended December 31, 2007, or 624%.  This was due primarily to an increase in the loss on closed futures contracts and a decrease in gross realized gains on sales of securities.  Rental and related income increased approximately 4% for the year ended December 31, 2007 as compared to the year ended December 31, 2006 primarily due to an increase in occupied sites, the acquisition of a new community during 2006 and rental increases to residents.  


Total expenses decreased by approximately 2% for the year ended December 31, 2007 as compared to the year ended December 31, 2006.  This was primarily due to a decrease in cost of sales of manufactured homes and selling expenses, partially offset by an increase in community operating expenses, general and administrative expenses and interest expense.  


Net income for the year ended December 31, 2007 decreased approximately 55% or $3,207,536 due primarily to a decrease in the gain on securities available for sales transactions of $1,665,224, a decrease in income from the sales operation of $517,968 and an increase in interest expense of $897,389 for the year ended December 31, 2007 as compared to the year ended December 31, 2006.  Community operations have remained relatively stable.  Management is continuing to seek communities for acquisition, but the current acquisition environment is very competitive.


Over the past five years, occupancy at our communities has declined from approximately 90% in 2002 to approximately 81% in 2007.  Management believes that the availability of liberal lending terms on loans for conventional housing created a difficult competitive market for land-leased manufactured home communities.  During 2007, the total number of occupied sites increased by 60 sites.  Overall occupancy declined from 82% at December 31, 2006 to 81% at December 31, 2007 primarily due to new expansion sites placed in service in the fourth quarter.  


See PART I, Item 1- Business and Item 1A – Risk Factors for a more complete discussion of the economic and industry-wide factors relevant to the Company, the Company's lines of business and principal products and services, and the opportunities, challenges and risks on which the Company is focused.


Significant Accounting Policies and Estimates


The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U. S. generally accepted accounting principles.  The preparation of these consolidated financial statements requires management to



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make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

    

Significant accounting policies are defined as those that involve significant judgment and potentially could result in materially different results under different assumptions and conditions. Management believes the following critical accounting policies are affected by our more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.  For a detailed description of these and other accounting policies, see Note 2 in the notes to the Company’s consolidated financial statements included in this Form 10-K.  


Real Estate Investments


The Company applies Financial Accounting Standards Board Statement No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (Statement 144) to measure impairment in real estate investments. Rental properties are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis without interest) from a rental property is less than its historical net cost basis. These expected future cash flows consider factors such as future operating income, trends and prospects as well as the effects of leasing demand, competition and other factors. Upon determination that a permanent impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the property measured at the time there is a commitment to sell the property and/or it is actively being marketed for sale. A property to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded.


 Securities Available for Sale


Investments in non-real estate assets consist primarily of marketable securities.  Management individually reviews and evaluates our marketable securities for impairment on an annual basis or when events or circumstances occur.  Management considers, among other things, credit aspects of the issuer, amount of decline in fair value over cost and length of time in a continuous loss position.  If a decline in fair value is determined to be other than temporary,  an impairment charge is recognized in earnings and the cost basis of the individual security shall be written down to fair value as the  new cost basis.  


The Company’s securities consist primarily of debt securities and common and preferred stock of other REITs.  These securities are all publicly-traded and purchased on the open market, through private transactions or through dividend reinvestment plans.  These securities are classified among three categories:  Held-to-maturity, trading and available-for-sale.  As of December 31, 2007 and 2006, the Company’s securities are all classified as available-for-sale and are carried at fair value based upon quoted market prices.  Gains or losses on the sale of securities are based on identifiable cost and are accounted for on a trade date basis.  Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Shareholders’ Equity until realized.  


Other


Estimates are used when accounting for the allowance for doubtful accounts for our rents and loans receivable, potentially excess and obsolete inventory and contingent liabilities, among others.  These estimates are susceptible to change and actual results could differ from these estimates.  The effects of changes in these estimates are recognized in the period they are determined.


Results of Operations


2007 vs. 2006


Rental and related income increased from $23,186,485 for the year ended December 31, 2006 to $23,997,178 for the year ended December 31, 2007, or approximately 4%, primarily due to an increase in occupied sites, the acquisition of a new community during 2006 and rental increases to residents.  During 2007, the Company was able to obtain average rent increases of approximately 4%.




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Occupancy as well as the ability to increase rental rates directly affects revenues.  The Company’s occupancy rate has decreased from 82% in 2006 to 81% in 2007.  This decline was the result of expansions sites placed in service in the fourth quarter.  The Company continues to evaluate further expansion at selected communities in order to increase the number of available sites, obtain efficiencies and enhance shareholder value.  The Company has faced many challenges in filling vacant homesites.  Despite selling approximately 240 newer homes into our communities, we only had a net increase in occupancy of approximately 60 sites.  These homes left the communities for various reasons, including demolished as obsolete.   Relatively low interest rates have continued to make site-built housing more accessible.  Attractive apartment rental deals continue to hinder occupancy advances.  


Sales of manufactured homes decreased from $15,799,748 for the year ended December 31, 2006 to $12,672,844 for the year ended December 31, 2007, or 20%.  Cost of sales of manufactured homes decreased from $12,433,851 for the year ended December 31, 2006 to $10,371,404 for the year ended December 31, 2007, or 17%.  Selling expenses decreased from $2,258,746 for the year ended December 31, 2006 to $1,712,257 for the year ended December 31, 2007, or 24%.  Income from the sales operations (defined as sales of manufactured homes less cost of sales of manufactured homes less selling expenses) decreased from $1,107,151 for the year ended December 31, 2005 to $589,183 for the year ended December 31, 2007, or 47%.  This decrease was primarily due to a decrease in sales.  Sales in 2006 included sales into our expansions at Fairview Manor and Highland Estates, which sold out during 2006.  These sales also commanded a higher gross profit percentage.  The gross profit percentage decreased from 21.3% for the year ended December 31, 2006 to 18.2% for the year ended December 31, 2007.  The Company believes that sales of new homes produces new rental revenue and is an investment in the upgrading of the communities.


Interest and dividend income increased from $3,156,255 for the year ended December 31, 2006 to $3,357,524 for the year ended December 31, 2007, or 6%.   This was primarily as a result of an increase in interest income due to a higher balance of notes receivable.  This was partially offset by a decrease in dividend income during 2007.


(Loss) Gain on securities transactions, net consists of the following:


 

2007

 

2006

    

Gross realized gains

    $    362,626

 

$ 1,029,759

Gross realized losses

(98,951)

 

(74,048)

Net (loss) gain on closed futures contracts

        (704,509)

 

(29,443)

Unrealized gain (loss) on open futures contracts

             40,781

 

163,828

Impairment loss

        (998,324)

 

(823,249)

    

Total (Loss) Gain on Securities Transactions, net

($1,398,377)

 

$ 266,847

    

(Loss) Gain on securities transactions, net decreased from a gain of $266,847 for the year ended December 31, 2006 to a loss of $1,398,377 for the year ended December 31, 2007.  This was due primarily to an increase in the loss on closed futures contracts of $675,066 and to a decrease in gross realized gains of $667,133 as a result of the Company’s decision to realize a portion of the unrealized gain in the securities portfolio existing during 2006.  During 2007 and 2006, the Company also recognized a loss of $998,324 and $823,249, respectively, due to write-downs to the carrying value of securities available for sale which were considered other than temporarily impaired.


Community operating expenses increased from $12,274,363 for the year ended December 31, 2006 to $12,633,042 for the year ended December 31, 2007, or 3%.  This was primarily as a result of the acquisition of a new community in 2006.


General and administrative expenses increased from $3,068,275 for the year ended December 31, 2006 to $3,583,594 for the year ended December 31, 2007, or 17%.  This was primarily as a result of an increase in personnel costs and franchise taxes.  The Company is continuing to expand its operations.  Total assets have increased from approximately $94,000,000 as of December 31, 2003 to approximately $137,000,000 as of December 31, 2007.




-21-





Interest expense increased from $3,273,720 for the year ended December 31, 2006 to $4,171,109 for the year ended December 31, 2007, or 27%.  This was primarily as a result of an increase in mortgages payable and the change in fair value of the Company’s interest rate swaps.  The change in fair value of the Company’s interest rate swaps increased interest expense by approximately $467,000 in 2007 and $68,000 in 2006.  Additionally, there was an increase in the average balance of our loans payable.  The average balance of our loans payable amounted to approximately $12,600,000 and $7,900,000 in 2007 and 2006, respectively.  Interest capitalized on construction in progress amounted to $378,030 and $225,800 for 2007 and 2006, respectively.


Depreciation expense increased from $3,415,570 for the year ended December 31, 2006 to $3,658,236 for the year ended December 31, 2007, or 7%, primarily as a result of the acquisition of the new community in 2006 and expansions placed in service in 2006 and 2007.


Amortization of financing costs decreased from $238,211 for the year ended December 31, 2006 to $177,636 for the year ended December 31, 2007.  This was primarily due to the expiration of our line of credit with PNC Bank.


Gain on sale of investment property and equipment decreased from $158,403 for the year ended December 31, 2006 to $99,318 for the year ended December 31, 2007, or 37%.  This was primarily as a result of the sale of older rental units to existing residents during 2006.


2006 vs. 2005


Rental and related income increased from $22,280,917 for the year ended December 31, 2005 to $23,186,485 for the year ended December 31, 2007, or 4%, primarily due to the expansion of existing communities in 2005, the acquisition of a new community during 2006 and rental increases to residents. During 2006, the Company was able to obtain an average rent increase of approximately 4%.


Occupancy as well as the ability to increase rental rates directly affect revenues.  The Company’s occupancy rate has decreased from 85% in 2005 to 82% in 2006.  Some of this decline was due to the purchase of Weatherly Estates, which was 59% occupied.  Some of the Company’s vacancies are also the result of expansions in progress.  The Company continues to evaluate further expansion at selected communities in order to increase the number of available sites, obtain efficiencies and enhance shareholder value.  The Company has faced many challenges in filling vacant homesites.  Despite selling approximately 280 newer homes into our communities, we had a net decrease in occupancy of approximately 100 units.  These homes left the communities for various reasons, including demolished as obsolete.   Relatively low interest rates have continued to make site-built housing more accessible.  Attractive apartment rental deals continue to hinder occupancy advances.  


Sales of manufactured homes increased from $12,436,980 for the year ended December 31, 2005 to $15,799,748 for the year ended December 31, 2006, or 27%.  Cost of sales of manufactured homes increased from $9,963,689 for the year ended December 31, 2005 to $12,433,851 for the year ended December 31, 2006, or 25%.  Selling expenses increased from $1,894,274 for the year ended December 31, 2005 to $2,258,746 for the year ended December 31, 2006, or 19%.  These increases were due to the increase in sales.  Income from the sales operations (defined as sales of manufactured homes less cost of sales of manufactured homes less selling expenses) increased from $579,017 for the year ended December 31, 2005 to $1,107,151 for the year ended December 31, 2006, or 91%.  The Company has been experiencing an increase in sales primarily due to the expansion of a number of our communities.  These sales have also commanded a higher gross profit percent.  The gross profit percent increased from 19.9% for the year ended December 31, 2005 to 21.3% for the year ended December 31, 2006.  The Company believes that sales of new homes produces new rental revenue and is an investment in the upgrading of the communities.


Interest and dividend income decreased from $3,224,679 for the year ended December 31, 2005 to $3,156,255 for the year ended December 31, 2006, or 2%.   This was primarily as a result of a decrease in dividend income due primarily to a lower average balance of securities available for sale during 2006 as a result of sales during 2005 and 2006.  This was partially offset by an increase in interest income due to a higher balance of notes receivable.


Gains on securities transactions, net consist of the following:




-22-








 

2006

 

2005

 
     

Gross realized gains

$ 1,029,759

 

$ 1,187,658

 

Gross realized losses

(74,048)

 

-0-

 

Net gain (loss) on closed futures contracts

(29,443)

 

95,801

 

Unrealized (loss) gain on open futures contracts

163,828

 

(50,625)

 

Impairment loss

(823,249)

 

-0-

 
     

Total Gain on Securities Transactions, net

$ 266,847

 

$ 1,232,834

 
     

Gains on securities transactions, net decreased from $1,232,834 for the year ended December 31, 2005 to $266,847 for the year ended December 31, 2006, or 78%.  This was due primarily to the $823,249 write-down to the carrying value of securities available for sale which were considered other than temporarily impaired.  Partially offsetting this decrease was a net gain on the futures contracts of $134,385 for 2006 as compared to $45,176 for 2005.


Community operating expenses increased from $11,773,859 for the year ended December 31, 2005 to $12,274,363 for the year ended December 31, 2006, or 4%.  This was primarily as a result of the acquisitions of a new community in 2006 and an increase in real estate taxes.


General and administrative expenses increased from $2,943,797 for the year ended December 31, 2005 to $3,068,275 for the year ended December 31, 2006, or 4%.  This was primarily as a result of an increase in payroll.  The Company is continuing to expand our operations.  Total assets have increased from approximately $89,000,000 as of December 31, 2002 to approximately $116,000,000 as of December 31, 2006.


Interest expense increased from $2,200,765 for the year ended December 31, 2005 to $3,273,720 for the year ended December 31, 2006, or 49%.  This was primarily as a result of the change in the fair market value of our interest rate swaps.  This change decreased interest expense by approximately $774,000 in 2005, but increased interest expense by approximately $68,000 in 2006, a swing of $842,000.  Additionally, there was an increase in the average balance of our loans payable.  The average balance of our loans payable amounted to approximately $7,900,000 and $4,200,000 in 2006 and 2005, respectively.  Interest capitalized on construction in progress amounted to $225,800 and $167,400 for 2006 and 2005, respectively.


Depreciation expense increased from $3,353,896 for the year ended December 31, 2005 to $3,415,570 for the year ended December 31, 2006, or 2%, primarily as a result of the acquisition of the new community in 2006 and expansions placed in service in 2005 and 2006.


Amortization of financing costs remained relatively stable for the year ended December 31, 2006 as compared to the year ended December 31, 2005.


Gain on sale of investment property and equipment increased from $43,489 for the year ended December 31, 2005 to $158,403 for the year ended December 31, 2006, or 264%.  This was primarily as a result of the sale of older rental units to existing residents.


Off-Balance Sheet Arrangements and Contractual Obligations


The Company has not executed any off-balance sheet arrangements.




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The following is a summary of the Company’s contractual obligations as of December 31, 2007:



Contractual Obligations


Total

Less than 1 year


1-3 years


3-5 years

More than 5 years

Mortgages Payable

$61,749,700

$10,708,593

$17,059,621

$6,220,513

$27,760,973

Operating Lease Obligations

420,000

180,000

240,000

-0-

-0-

Retirement Benefits

  

802,050

65,000

115,000

100,000

522,050

Total

$62,971,750

$10,953,593

$17,414,621

$6,320,513

$28,283,023


Mortgages payable represents the principal amounts outstanding based on scheduled payments.  The interest rates on these mortgages vary from fixed rates ranging from 4.625% to 8.04% and variable rates of prime plus ½% to LIBOR plus 1.55% to 1.75%.  The above table does not include the Company’s obligation under short-term borrowings including its lines of credit and margin loan as described in Note 5 of the Notes to Consolidated Financial Statements.


Operating lease obligations represent a lease, with a related party, for the Company’s corporate offices.  The original lease is for a five-year term with monthly lease payments of $12,000.  During 2005, the Company renewed this lease for an additional five-year term with monthly lease payments of $15,000.  The Company is also responsible for its proportionate share of real estate taxes and common area maintenance.  Approximately 50% of the monthly lease payment plus its proportionate share of real estate taxes and common area maintenance is reimbursed by other related entities utilizing the leased space (See Note 8 of the Notes to Consolidated Financial Statements).  


Retirement benefits represent the total future amount to be paid, on an undiscounted basis, relating to two executive officers.  These benefits are based upon specific employment agreements with these two executives.  The agreements do not require the Company to separately fund the obligation and therefore will be paid from the general assets of the Company.  The Company has accrued these benefits on a present value basis over the terms of the agreements (See Note 8 of the Notes to Consolidated Financial Statements).  


Liquidity and Capital Resources


The Company operates as a real estate investment trust deriving its income primarily from real estate rental operations.  The Company’s shareholders’ equity decreased from $57,640,419 as of December 31, 2006 to $53,995,133 at December 31, 2007, principally due to distributions to shareholders in excess of net income and to a decrease in unrealized gains on securities available for sale.  This was partially offset by proceeds from the dividend reinvestment and stock purchase plan (DRIP).


The Company’s ability to generate cash adequate to meet its needs 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.  Purchases of new properties, purchases of manufactured home inventory, investment in debt and equity securities of other REITS, financing of manufactured home sales, payments of expenses related to real estate operations, capital improvements and expansion programs, debt service, management and professional fees, and dividend requirements place demands on the Company’s liquidity.


The Company intends to operate its existing properties from the cash flows generated by the properties.  However, the Company’s expenses are affected by various factors, including inflation.  Increases in operating expenses raise the breakeven point for a property and, to the extent that they cannot be passed on through higher rents, reduce the amount of available cash flow which can adversely affect the market value of the property.


Management does not see an indication that material factors are present that may negatively impact cash flows.  The Company is not aware of adverse trends, demands, commitments, events or uncertainties that are



-24-





reasonably likely to have an impact on the Company’s liquidity.  At December 31, 2007, the Company owns securities available for sale of $23,523,231, subject to margin and term loans totaling $8,030,942.  At December 31, 2007, the Company owns twenty-eight communities of which 12 are unencumbered.  The Company also has a $5,000,000 line of credit, of which $3,000,000 was utilized at December 31, 2007.  These marketable securities, non-mortgaged properties and line of credit provide the Company with additional liquidity.   The Company has been raising capital through its DRIP.  The Company believes that funds generated from operations and the DRIP, the funds available on the line of credit, together with the ability to finance and refinance its properties and sell marketable securities will provide sufficient funds to adequately meet its obligations over the next several years.


Net cash provided by operating activities amounted to $2,766,606, $4,161,938 and $3,034,698 for the years ended December 31, 2007, 2006 and 2005, respectively.  Cash flow was primarily used for capital improvements, payment of dividends, purchases of securities available for sale, purchase of inventory of manufactured homes, loans to customers for the sales of manufactured homes, purchases of manufactured home communities and expansion of existing communities.  The Company meets maturing mortgage obligations by using a combination of cash flow and refinancing.  The dividend payments were primarily made from cash flow from operations.  The decrease in 2007 as compared to 2006 was primarily due to a decrease in net income, an increase in inventory of manufactured homes, and an increase in notes and other receivables due to the financing manufactured home sales.  

The increase in 2006 as compared to 2005 was primarily due to a smaller increase in inventory.  


Net cash used by investing activities amounted to $21,089,748, $2,591,532 and $13,415,488 for the years ended December 31, 2007, 2006 and 2005, respectively.  Net cash provided (used) by financing activities amounted to $18,540,091, ($4,120,735) and $6,161,334 for the years ended December 31, 2007, 2006 and 2005, respectively.  In addition to normal operating expenses, the Company requires cash for additional investments in manufactured home communities, capital improvements and expansion programs, purchase of manufactured homes for rent, purchases of securities, scheduled mortgage amortization and dividend distributions.


During 2006, the Company purchased a manufactured home community in Lebanon, Tennessee for a total purchase price of approximately $5,200,000.  


The Company invests in debt and equity securities of other REITs for liquidity and additional income.  During 2007, the Company’s securities portfolio increased by approximately $5,600,000 primarily due to purchases of approximately $12,700,000, partially offset by sales of approximately $5,700,000 and a decrease in the unrealized gain of approximately $1,400,000.  The Company from time to time may purchase these securities on margin when there is an adequate yield spread.  At December 31, 2007, $5,530,942 was outstanding on the margin loan.  Additionally, the Company also has a $2,500,000 loan with Two River Community Bank collateralized by the $5,000,000 Monmouth Capital Corporation 8% convertible subordinated debentures.


The Company owns approximately 560 rental units.  Once these homes reach 10 years old, the Company generally sells them.  The Company estimates that in 2008 it will purchase approximately 50 manufactured homes to replace these homes for a total cost of approximately $1,500,000.  Management believes that these manufactured homes will each generate approximately $300 per month in rental income in addition to lot rent.  


Capital improvements include amounts needed to meet environmental and regulatory requirements in connection with the manufactured home communities that provide water or sewer service.  Excluding expansions and rental home purchases, the Company is budgeting approximately $1,000,000 in capital improvements for 2008.  


The Company’s only significant commitments and contractual obligations relate to its mortgages payable, retirement benefits and the lease on its corporate offices as described in Note 8 to the Consolidated Financial Statements.


The Company has a Dividend Reinvestment and Stock Purchase Plan (Plan), in which participants can purchase stock from the Company at a price at approximately 95% of market.  During 2007, amounts received, including dividends reinvested of $1,840,527, amounted to $5,306,062.  During 2007, the Company paid $10,543,602, including dividends reinvested. The success of the Plan resulted in a substantial improvement in the Company’s liquidity and capital resources in 2007.


During the year ended December 31, 2007, two employees exercised their stock options and purchased 18,812 shares for a total of $254,121.  During the year ended December 31, 2006, six employees exercised their



-25-





stock options and purchased 38,000 shares for a total of $407,613.  During the year ended December 31, 2005, seven employees exercised their stock options and purchased 138,000 shares for a total of $1,266,913.  


The Company has undeveloped land which it could develop over the next several years. The Company is also exploring the utilization of vacant land for town houses.  The Company continues to analyze the highest and best use of its vacant land, and uses it accordingly.


As of December 31, 2007, the Company had total assets of $136,503,463 and liabilities of $82,508,330.  The Company believes that it has the ability to meet its obligations and to generate funds for new investments.


Recent Accounting Pronouncements


In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48).  FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.


We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions but, as a REIT, we generally do not pay tax on our net income distributed as dividends to our shareholders. Our taxable subsidiary does not join in our consolidated REIT tax filings and as such is itself subject to federal income tax as well as income tax in multiple state and local jurisdictions. As required, we adopted FIN 48 effective January 1, 2007 and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48.


        In 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), SFAS 157 defines fair value, established a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value.  SFAS 157 does not expand or require any new fair value measures, however the application of this statement may change current practice.   The requirements of SFAS 157 are first effective for our fiscal year beginning January 1, 2008.  However, in February 2008 the FASB decided that an entity need not apply this standard to non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year.  Accordingly, our adoption of this standard on January 1, 2008 is limited to financial assets and liabilities and we are currently assessing what impact, if any, the adoption of SFAS 157 will have on our financial position and results of operations.

        In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (SFAS 159).  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, with few exceptions.  SFAS 159 also established presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for our fiscal year beginning January 1, 2008. We do not believe that the adoption of this statement will have a material effect on our financial condition or results of operations.


Item 7A – Quantitative and Qualitative Disclosures About Market Risk


The Company's principal market risk exposure is interest rate risk.  The Company mitigates this risk by maintaining prudent amounts of leverage, minimizing capital costs and interest expense while continuously evaluating all available debt and equity resources and following established risk management policies and procedures, which include the periodic use of derivatives.  The Company's primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows.  The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt.  The Company does not enter into derivative instruments for speculative purposes.




-26-





The following table sets forth information as of December 31, 2007, concerning the Company’s long-term debt obligations, including principal cash flow by scheduled maturity, weighted average interest rates and estimated fair value.


  

Fixed Rate

Average Fixed

Variable Rate

 

Total

  

Carrying Value

Interest Rate

Carrying Value

 

Long-Term Debt

       
 

2008

$             4,438,074

4.625%

$4,782,606

 

$9,220,680

 

2009

2,825,496

4.750%

13,334,033

 

16,159,529

 

2010

          -0-

-0-

          -0-

 

          -0-

 

2011

5,112,246

6.360%

          -0-

 

5,112,246

 

2012

5,053,403

7.360%

          -0-

 

5,053,403

 

Thereafter

23,397,590

6.117%

2,806,252

 

26,203,842

 

Total

$40,826,809

 

$20,922,891

 

$61,749,700

 

Estimated Fair Value


$41,428,086

 


$20,922,891

 


$62,350,977


The Company’s variable rate long-term debt consists of four mortgage loans with interest rates ranging from prime plus ½% to LIBOR plus 1.55% to 1.75%.  To minimize the variability that changes in interest rates could have on its future cash flows, the Company has entered into three separate interest rate swap agreements.  The interest rate swap agreements have the effect of fixing interest rates relative to specific mortgage loans totaling approximately $18,100,000.  The effective fixed interest rates on these loans range from 5.17% to 5.82%.


The Company's remaining variable rate debt totals $2,800,000 as of December 31, 2007 which bears interest at prime plus ½%.  If prime increased or decreased by 1%, the Company believes its interest expense would have increased or decreased by approximately $28,000, based on the balance of long-term debt outstanding at December 31, 2007.


The Company also has approximately $14,500,000 in variable rate debt due on demand.  This debt primarily consists of $5,500,000 margin loans secured by marketable securities, a $6,000,000 inventory financing loan and $3,000,000 outstanding on our line of credit.  The interest rates on these loans range from 6% to 10.5% at December 31, 2007.  The carrying value of the Company’s variable rate debt approximates fair value at December 31, 2007.


The Company also invests in both debt and equity securities of other REITs and is primarily exposed to equity price risk from adverse changes in market rates and conditions.  All securities are classified as available for sale and are carried at fair value.   The Company invests in futures contracts of ten-year treasury notes with the objective of reducing the exposure of the preferred equity and debt securities portfolio to interest rate fluctuations and to mitigate the risk of rolling over fixed rate debt at higher interest rates upon maturity.  These contracts are marked to market with changes in market recognized in income.


Item 8 – Financial Statements and Supplementary Data


The financial statements and supplementary data listed in Part IV, Item 15(a)(1) are incorporated herein by reference and filed as part of this report.





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The following is the Unaudited Selected Quarterly Financial Data:


SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

THREE MONTHS ENDED


2007

March 31

 

June 30

 

September 30

 

December 31

        

Total Revenues

$8,800,346

 

$11,351,020

 

$9,971,274

 

$8,718,061

Total Expenses

7,995,017

 

9,457,305

 

9,884,271

 

         8,970,685

Net Income  (1)

837,241

 

1,928,327

 

110,239

 

           (243,066)

Net Income per Share –

  Basic


.08

 


.18

 


.01

 


(.02)

  Diluted

.08

 

.18

 

.01

 

(.02)

        

2006

March 31

 

June 30

 

September 30

 

December 31

        

Total Revenues

$9,512,201

 

$10,343,852

 

$9,894,006

 

$12,894,551

Total Expenses

7,388,513

 

9,168,697

 

9,658,698

 

10,746,828

Net Income  (1)

2,140,525

 

1,217,949

 

276,075

 

2,205,728

Net Income per Share –

  Basic


.22

 


.12

 


.03

 


.22

  Diluted

.22

 

.12

 

.03

 

.22

        

(1)

Fluctuations are primarily due to changes in the fair value of interest rate swaps and Gain on Securities Transactions, net.


Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


None


Item 9A – Controls and Procedures


Disclosure Controls and Procedures


The Company maintains controls and procedures designed to ensure that it is able to collect the information that is required to be disclosed in the reports it files with the SEC, and to process, summarize and disclose this information within the time period specified by the rules of the SEC. The Company’s Chief Executive Officer and the Chief Financial Officer are responsible for establishing, maintaining and enhancing these controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of December 31, 2007, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.




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Internal Control Over Financial Reporting


(a)

Management’s Annual Report on Internal Control Over Financial Reporting


Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements.   All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance regarding the reliability of financial statement preparation and presentation.


Management assessed the Company’s internal control over financial reporting as of December 31, 2007.  This assessment was based on criteria for effective internal control over financial reporting established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.


Reznick Group, P.C., the Company’s independent registered public accounting firm, has issued their report on their audit of the Company’s internal control over financial reporting, a copy of which is included herein.

 

(b)

Attestation Report of the Independent Registered Public Accounting Firm

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Shareholders of UMH Properties, Inc.


We have audited UMH Properties, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). UMH Properties, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



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In our opinion, UMH Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, shareholders’  equity and comprehensive income, and cash flows of UMH Properties, Inc., and our report dated March 10, 2008 expressed an unqualified opinion.


/s/ Reznick Group, P.C.


Baltimore, Maryland

March 10, 2008


(c)    Changes in Internal Control Over Financial Reporting


There have been no changes to internal control over financial reporting during the Company’s fourth fiscal quarter.


Item 9B – Other Information


None.





-30-





PART III


Item 10 – Directors, Executive Officers and Corporate Governance


The following are the Directors and Executive Officers of the Company as of December 31, 2007.




Name



Age

Present Position with the Company; Business

Experience During Past Five Years; Other

                          Directorships                              


Director
  Since  

    

Anna T. Chew

49

Vice President and Chief Financial Officer (1995 to present), Controller (1991 to 1995) and Director.  Certified Public Accountant; Chief Financial Officer (1991 to present) and Director (1993 to 2004, and 2007 to present) of Monmouth Real Estate Investment Corporation, an affiliated company.

1995

    

Eugene W. Landy

74

Chairman of the Board (1995 to present), President (1969 to 1995) and Director.  Attorney at Law; President, Chief Executive Officer and Director (1968 to present) of Monmouth Real Estate Investment Corporation, an affiliated company.  

1969

    

Michael P. Landy       

45

Vice President - Investments.  Executive Vice President – Investments (2001 to present) of Monmouth Real Estate Investment Corporation, an affiliated company; President (1998 to 2001) of Siam Records, LLC.  

N/A

    

Samuel A. Landy

47

President (1995 to present), Vice President (1991-1995) and Director.  Attorney at Law; Director (1989 to present) of Monmouth Real Estate Investment Corporation, an affiliated company.  

1992

    

James E. Mitchell

67

Independent Director.  Attorney at Law; General Partner, Mitchell Partners, L.P. (1979 to present); President, Mitchell Capital Management, Inc. (1987 to present).

2001

    

Richard H. Molke

81

Independent Director.  General Partner of Molke Family Limited Partnership (1994 to present).

1986

    

Eugene Rothenberg

75

Independent Director.  Retired physician; Director (2007 to present) of Monmouth Real Estate Investment Corporation, an affiliated company.

1977

    

Stephen B. Wolgin

53

Independent Director.  Managing Director of U.S. Real Estate Advisors, Inc. (2000 to present), a real estate advisory services group based in New York; Director (2003 to present) of Monmouth Real Estate Investment Corporation, an affiliated company; Principal of the Wolgin Group (2000-2003); prior affiliations with J.P. Morgan, Odyssey Associates, The Prudential Realty Group, Standard & Poor’s Corporation, and Grubb and Ellis;.

2007

    




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Family Relationships

There are no family relationships between any of the Directors or executive officers, except that Samuel A. Landy and Michael P. Landy are the sons of Eugene W. Landy, the Chairman of the Board and a Director of the Company.


Audit Committee


The Company has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)).  The members of the audit committee are James E. Mitchell (Chairman), Richard H. Molke, Eugene Rothenberg and Stephen B. Wolgin.  The Company’s Board of Directors has determined that James E. Mitchell and Stephen B. Wolgin are financial experts and are independent.  


Delinquent Filers


There have been no delinquent filers pursuant to Item 405 of regulation S-K, to the best of management’s knowledge.


Code of Ethics


The Company has adopted the Code of Business Conduct and Ethics (the Code of Ethics).  The Code of Ethics can be found at the Company’s website at www.umh.com.   In addition, the Code of Ethics was filed with the Securities Exchange Commission on March 11, 2004 with the Company’s December 31, 2003 Form 10-K.  The Company will satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding a waiver from any provision of the Code of Ethics for principal officers or directors by disclosing the nature of such amendment of waiver on our website.


Item 11 – Executive Compensation


Compensation Discussion and Analysis


Overview of Compensation Program


The Compensation Committee (for purposes of this analysis, the "Committee") of the Board has been appointed to discharge the Board's responsibilities relating to the compensation of the Company's executive officers. The Committee has the overall responsibility for approving and evaluating the executive officer compensation plans, policies and programs of the Company. The Committee's primary objectives include serving as an independent and objective party to review such compensation plans, policies and programs.


Throughout this report, the individuals who served as the Company’s chief executive officer and chief financial officer during fiscal 2007, as well as the other individuals included in the Summary Compensation Table presented below in Item 11 of this report, are sometimes referred to in this report as the "named executive officers."


Compensation Philosophy and Objectives


The Compensation Committee believes that a well-designed compensation program should align the goals of the shareholders with the goals of the chief executive officer, and that a significant part of the executive's compensation, over the long term, should be dependent upon the value created for shareholders. In addition, all executives should be held accountable through their compensation for the performance of the Company, and compensation levels should also reflect the executive's individual performance in an effort to encourage increased individual contributions to the Company's performance. The compensation philosophy, as reflected in the Company's employment agreements with its executives, is designed to motivate executives to focus on operating results and create long-term shareholder value by:


• establishing a plan that attracts, retains and motivates executives through compensation that is competitive with a peer group of other publicly-traded real estate investment trusts, or REITs;


• linking a portion of executives' compensation to the achievement of the Company's business plan by using measurements of the Company's operating results and shareholder return; and



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• building a pay-for-performance system that encourages and rewards successful initiatives within a team environment.

        The Compensation Committee believes that each of the above factors is important when determining compensation levels for named executive officers.  The Committee reviews and approves the employment contracts for the Chairman of the Board and the President, including performance goals and objectives.  The Committee annually evaluates performance of these executive officers in light of those goals and objectives. The Committee considers the Company's performance, relative shareholder return, the total compensation provided to comparable officers at similarly-situated companies, and compensation given to named executive officers in prior years. To that end, the Committee believes executive compensation packages provided by the Company to its executive officers should include both base salaries and annual bonus awards that reward corporate and individual performance, as well as give incentives to those executives who meet or exceed established goals.

Role of Executive Officers in Compensation Decisions


The Committee makes all final compensation decisions for the Company's executive officers. The president annually reviews the performance of the chief financial officer and then presents his conclusions and recommendations to the Committee with respect to base salary adjustments and annual cash bonus and stock option awards. The Committee exercises its own discretion in modifying any recommended adjustments or awards, but does consider the recommendations from the president.


Role of Grants of Stock Options in Compensation Analysis


The Committee views the grant of stock options as a form of long-term compensation.  The Committee believes that the grant of these options promotes the Company's goal of retaining key employees, and aligns the key employee's interests with those of the Company's shareholders from a long-term perspective.


Role of Employment Agreements in Determining Executive Compensation


Each of the Company's currently employed executive officers is a party to an employment agreement.  These agreements provide for base salaries, bonuses and customary fringe benefits.  


Base Salaries


Base salaries are paid for ongoing performance throughout the year. In order to compete for and retain talented executives who are critical to the Company's long-term success, the Committee has determined that the base salaries of named executive officers should approximate those of executives of other equity REITs that compete with the Company for employees, investors and business, while also taking into account the named executive officers' performance and tenure and the Company's performance relative to its peer companies within the REIT sector.   


Bonuses


In addition to the provisions for base salaries under the terms of our employment agreements, the president is entitled to receive annual cash bonuses for each calendar year during the term of the agreement, based on the achievement of certain performance goals set by the Committee.  


In addition to its determination of the executive's individual performance levels for 2007, the Committee also compared the executive's total compensation for 2007 to that of similarly-situated personnel in the REIT industry.




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Stock Options


The employment agreements also provide that certain executives are eligible for grants of stock options.  

 

Perquisites and Other Personal Benefits


The Company's employment agreements provide the executive officers with perquisites and other personal benefits that the Company and the Committee believe are reasonable and consistent with its overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to the executive officers.


The named executive officers are provided the following benefits under the terms of their employment agreements: an allotted number of paid vacation weeks; eligibility for the executives, spouses and dependents in all Company sponsored employee benefits plans, including 401(k) plan, group health, accident, and life insurance, on such terms no less favorable than applicable to any other executive; use of an automobile; and, supplemental long-term disability insurance, at the Company's cost, as agreed to by the Company and the executive.  Attributed costs of the personal benefits described above for the named executive officers for the fiscal year ended December 31, 2007, are included in “All Other Compensation” of the Summary Compensation Table provided below under Item 11 of this report.


In addition, the named executive officers' employment agreements each contain provisions relating to change in control events and severance upon termination for events other than without cause or good reason (as defined under the terms of the employment agreements). These change in control and severance terms are designed to promote stability and continuity of senior management. Information regarding these provisions is included in “Employment Contracts” provided below in Item 11 of this report.


Evaluation


Mr. Eugene Landy is under an employment agreement with the Company.  His base compensation under his amended contract was increased in 2004 to $175,000 per year.  Mr. Eugene Landy also received $18,801 in director’s fees and fringe benefits.  


The Committee also reviewed the progress made by Mr. Samuel A. Landy, President, including funds from operations.  Mr. Samuel Landy is under an employment agreement with the Company.  His base compensation under this contract is $363,739 for 2007.  Mr. Samuel Landy also received bonuses totaling $42,239 and $22,600 in director’s fees and fringe benefits.  These bonuses were primarily based upon his meeting certain performance goals as outlined in his employment agreement.


Ms. Chew is under an employment agreement with the Company.  Her base compensation under this contract is $236,389 for 2007.  Ms. Chew also received bonuses totaling $22,092 and $25,070 in director’s fees and fringe benefits.  These bonuses were based on performance, recommended by the president and approved by the Committee.


Compensation Committee Report


The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this report.


Compensation Committee:

James E. Mitchell

Richard H. Molke

Eugene Rothenberg

Stephen B. Wolgin

 




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SUMMARY COMPENSATION TABLE


The following Summary Compensation Table shows compensation paid by the Company for services rendered during 2007, 2006 and 2005 to the Chairman of the Board, President and Vice President.  There were no other executive officers whose aggregate cash compensation exceeded $100,000:


Name and

Principal Position

Year

Salary

Bonus

Option Awards (5)

All Other Compen-sation

Total

       

Eugene W. Landy

2007

$175,000

$      -0-

$      -0-

$18,801 (1)

$193,801

Chairman of the

2006

175,000

      -0-

     -0-

36,300 (2)

211,300

Board

2005

175,000

      -0-

      -0-

36,931 (2)

211,931

       

Samuel A. Landy

2007

363,739

42,239

67,876

22,600 (3)

496,454  

President

2006

346,418

63,513

69,318

25,600 (3)

504,849

 

2005

329,922

60,689

69,208

24,465 (3)

484,284

       

Anna T. Chew (4)

2007

236,389

22,092

12,600

25,070 (3)

296,151  

Vice President

2006

225,133

23,659

15,000

25,969 (3)

289,761

 

2005

214,412

20,247

12,600

25,470 (3)

272,729

(1)

Represents Director’s fees of $16,000 and fringe benefits.


(2)

Represents Director’s fees of $16,000, legal fees and fringe benefits.


(3)

Represents Director’s fees of $16,000, fringe benefits and discretionary contributions by the Company to the Company’s 401(k) Plan allocated to an account of the named executive officer.


(4)

Approximately 25% of her compensation is billed to Monmouth Real Estate Investment Corporation and, prior to the merger, Monmouth Capital Corporation, related companies.


(5)

These values were established using the Black-Scholes stock option valuation model. The following weighted-average assumptions were used in the model for 2007, 2006 and 2005, respectively: expected volatility of 18.09%, 18.50% and 19.04%; risk-free interest rate of 4.79%, 4.63% and 4.01%; dividend yield of 6.54, 6.33% and 6.35%; and expected life of the options of eight years. The actual value of the options will depend upon the performance of the Company during the period of time the options are outstanding and the price of the Company’s common stock on the date of exercise.


(6)

Michael P. Landy, the Company’s Vice President – Investments, is paid by Monmouth Real Estate Investment Corporation, a related company.  Approximately $55,000 of his compensation cost is charged to the Company by Monmouth Real Estate Investment Corporation.




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GRANTS OF PLAN-BASED AWARDS


On August 14, 2003, the shareholders approved and ratified the Company’s 2003 Stock Option Plan (the 2003 Plan) authorizing the grant to officers and key employees of options to purchase up to 1,500,000 shares of common stock.  All options are exercisable one year from the date of grant.  The option price shall not be below the fair market value at date of grant.  If options granted under the 2003 Plan expire or terminate for any reason without having been exercised in full, the Shares subject to, but not delivered under, such options shall become available for additional option grants under the 2003 Plan.  This Plan replaced the Company’s 1994 Stock Option Plan which, pursuant to its terms, terminated December 31, 2003.  The outstanding options granted under this plan remain outstanding until exercised, forfeited or expired.


The following table sets forth, for the executive officers named in the Summary Compensation Table, information regarding individual grants of stock options made during the year ended December 31, 2007:



Name

Grant

Date

Number of Shares Underlying Options (1)

Exercise Price of Option Award

    

Samuel A. Landy

01/03/07

5,800

$17.06

Samuel A. Landy

01/03/07

44,200

15.51

Anna T. Chew

07/19/07

10,000

14.21

    

(1)

These options expire 8 years from grant date.


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END


The following table sets forth for the executive officers named in the Summary Compensation Table, information regarding stock options outstanding at December 31, 2007:



Name

Number of Securities Underlying Unexercised Options

Exercisable

Number of Securities Underlying Unexercised Options

UnExercisable

Option Exercise Price

Option Expiration Date

     

Samuel A. Landy

25,000

 

12.95

01/04/10

Samuel A. Landy

25,000

 

16.92

08/18/11

Samuel A. Landy

25,000

 

18.62

01/16/12

Samuel A. Landy

6,400

 

17.19

02/01/13

Samuel A. Landy

43,600

 

15.62

02/01/13

Samuel A. Landy

5,800

 

17.21

01/09/14

Samuel A. Landy

44,200

 

15.62

01/09/14

Samuel A. Landy

 

5,800

17.06

01/03/07

Samuel A. Landy

 

44,200

15.51

01/03/07

     

Anna T. Chew

10,000

 

15.00

08/25/11

Anna T. Chew

10,000

 

13.05

07/06/12

Anna T. Chew

10,000

 

15.05

07/18/13

Anna T. Chew

10,000

 

15.15

07/21/14

Anna T. Chew

 

10,000

14.21

07/19/07

     

Employment Contracts


The Company has an Employment Agreement with Mr. Eugene W. Landy, Chairman of the Board.  Under this agreement, Mr. Landy received an annual base compensation of $150,000 (as amended) plus bonuses and



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customary fringe benefits, including health insurance, participation in the Company’s 401(k) Plan, stock options, five weeks’ vacation and use of an automobile.  Additionally, there may be bonuses voted by the Board of Directors.  The Employment Agreement is terminable by either party at any time subject to certain notice requirements.  On severance of employment by the Company, Mr. Landy will receive severance of $450,000, payable $150,000 on severance and $150,000 on the first and second anniversaries of severance.  In the event of disability, Mr. Landy’s compensation will continue for a period of three years, payable monthly.  On retirement, Mr. Landy will receive a pension of $50,000 a year for ten years, payable in monthly installments.  In the event of death, Mr. Landy’s designated beneficiary will receive $450,000, $100,000 thirty days after death and the balance one year after death.  The Employment Agreement automatically renews each year for successive one-year periods.  Effective January 1, 2004, this agreement was amended to increase Mr. Landy's annual base compensation to $175,000.  Additionally, Mr. Landy's pension benefit of $50,000 per year has been extended for an additional three years.  

Effective January 1, 2005, the Company and Samuel A. Landy entered into a three-year Employment Agreement under which Mr. Samuel Landy receives an annual base salary of $329,922 for 2005, $346,418 for 2006 and $363,739 for 2007 plus bonuses and customary fringe benefits.  Bonuses are at the discretion of the Board of Directors and are based on certain guidelines.  Mr. Samuel Landy will also receive four weeks vacation, use of an automobile, and stock options for 50,000 shares in each year of the contract.  On severance by the Company, Mr. Samuel Landy is entitled to one year’s salary.  In the event of disability, Mr. Samuel Landy will receive lost wages from a disability insurance policy.  In the event a merger of the Company, sale or change of control, Mr. Landy shall have the right to extend and renew this Employment Agreement so that the expiration date will be three years from the date of merger, sale or change of control.


Effective January 1, 2006, the Company and Anna T. Chew entered into a three-year Employment Agreement.  Ms. Chew will receive an annual base salary of $225,133 for 2006, plus bonuses and customary fringe benefits.  Each year Ms. Chew will receive a 5% increase in her base salary.  Ms. Chew will also receive four weeks vacation, use of an automobile, and stock options for 10,000 shares in each year of the contract.  On severance by the Company, Ms. Chew is entitled to an additional one year’s salary.  In the event of disability, Ms. Chew will receive lost wages from a disability insurance policy.  In the event of a merger of the Corporation, sale or change of control, Ms. Chew shall have the right to extend and renew this Employment Agreement so that the expiration date will be three years from the date of merger, sale or change of control.


Other Information

Except as provided in the specific agreements described above, the Company has no pension or other post-retirement plans in effect for Officers, Directors or employees.  The Company’s employees may elect to participate in the Company’s 401(k) Plan.


DIRECTOR COMPENSATION


The Directors receive a fee of $1,500 for each Board meeting attended, and an additional fixed annual fee of $10,000, payable $2,500 quarterly.   Directors appointed to house committees receive $150 for each meeting attended.  Those specific committees are Compensation Committee, Audit Committee and Nominating Committee.  




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The following table sets forth a summary of director compensation for the fiscal year ended December 31, 2007:

 

Fees Earned or Paid in Cash

Director

Annual Board

Cash Retainer

 

Meeting

Fees

 

Committee

Fees

 

Total

        

Ernest Bencivenga (1)

$10,000

 

$6,000

 

$-0-

 

$16,000

Anna T. Chew

10,000

 

6,000

 

-0-

 

16,000

Charles Kaempffer (1)

10,000

 

6,000

 

600

 

16,600

Eugene W. Landy

10,000

 

6,000

 

-0-

 

16,000

Samuel A. Landy

10,000

 

6,000

 

-0-

 

16,000

James E. Mitchell (2)

10,000

 

6,000

 

900

 

16,900

Richard H. Molke (2)

10,000

 

6,000

 

900

 

16,900

Eugene Rothenberg (2)

10,000

 

6,000

 

900

 

16,900

Robert G. Sampson (1) (3)

10,000

 

3,000

 

150

 

13,150

Stephen B. Wolgin (2)

5,000

 

3,000

 

300

 

8,300

        

Total

$95,000

 

$54,000

 

$3,750

 

$152,750


(1)

Emeritus directors are retired directors who are not entitled to vote on board resolutions; however they receive directors’ fees for participation in the board meetings.

(2)

Mr. Mitchell, Mr. Molke, Mr. Rothenberg and Mr. Wolgin are members of the audit committee, the compensation committee and the nominating committee.  The Board has determined that Mr. Mitchell and Mr. Wolgin are considered an “audit committee financial expert” within the meaning of the rules of the SEC and are “financially sophisticated” within the meaning of the listing requirements of the American Stock Exchange.

(3)

Mr. Sampson, a long-time Director of the Company, has retired and did not stand for re-election.  He has served the Company with distinction.

Compensation Committee Interlocks and Insider Participation


There are no compensation committee interlocks and no member of the compensation committee has served as an officer or employee of the Company or any of its subsidiaries at any time.


Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


The following table lists information with respect to the beneficial ownership of the Company’s Shares as of December 31, 2007 by:


-

each person known by the Company to beneficially own more than five percent of the Company’s outstanding Shares;

-

the Company’s directors;

-

the Company’s executive officers; and

-

all of the Company’s executive officers and directors as a group.

Unless otherwise indicated, the person or persons named below have sole voting and investment power and that person’s address is c/o UMH Properties, Inc., Juniper Business Plaza, 3499 Route 9 North, Suite 3-C, Freehold, New Jersey 07728.  In determining the number and percentage of Shares beneficially owned by each person, Shares that may be acquired by that person under options exercisable within 60 days of December 31, 2007 are deemed



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beneficially owned by that person and are deemed outstanding for purposes of determining the total number of outstanding Shares for that person and are not deemed outstanding for that purpose for all other shareholders.

 

Name and Address
of Beneficial Owner


Amount and Nature
of Beneficial Ownership (1)

Percentage
of Shares
  Outstanding (2)

   

Anna T. Chew

  143,977(3)

1.33%

Eugene W. Landy

1,056,637(4)

9.83%

Samuel A. Landy

 515,988(5)

4.26%

Michael P. Landy

 162,322(6)

1.51%

James E. Mitchell

 170,837(7)

1.59%

Richard H. Molke

 109,656(8)

1.02%

Eugene D. Rothenberg

82,822(9)

*

Stephen B. Wolgin

5,337(10)

*

Directors and Officers as a Group


* Less than 1%

              2,197,576

20.04%

___________________________


(1)  

Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the Company believes that the persons named in the table have sole voting and investment power with respect to all Shares listed.


(2)

Based on the number of Shares outstanding on December 31, 2007 which was 10,752,775 Shares.

(3)

Includes (a) 103,977 shares owned jointly with Ms. Chew’s husband, (b) 7,600 shares held in Ms. Chew’s 401(k) Plan, and (c) 40,000 shares issuable upon exercise of stock options.   Excludes 10,000 shares issuable upon exercise of a stock option, which stock option is not exercisable until July 16, 2008.

 (4)

Includes (a) 109,738 shares owned by Mr. Landy’s wife, (b) 172,608 shares held by Landy Investments, Ltd. for which Mr. Landy has power to vote, (c) 73,213 shares held in the Landy & Landy Employees’ Profit Sharing Plan of which Mr. Landy is a Trustee with power to vote, (d) 57,561 shares held in the Landy & Landy Employees’ Pension Plan of which Mr. Landy is a Trustee with power to vote, (e) 50,000 shares held in the Eugene W. Landy Charitable Lead Annuity Trust, a charitable trust for which Mr. Landy has power to vote, and (f) 75,000 shares held in the Eugene W. Landy and Gloria Landy Family Foundation, a charitable trust for which Mr. Landy has power to vote.    

(5)

Includes (a) 30,864 shares owned jointly with Mr. Landy’s wife, (b) 37,297 shares in custodial accounts for Mr. Landy’s minor children under the NJ Uniform Transfers to Minors Act in which he disclaims any beneficial interest but has power to vote, (c) 6,221 shares in the Samuel Landy Limited Partnership, (d) 12,919 shares held in Mr. Landy’s 401(k) Plan, and (e) 225,000 shares issuable upon exercise of stock options.    Excludes 50,000 shares issuable upon exercise of a stock option, which stock option is not exercisable until January 8, 2009.  

(6)

Includes (a) 6,785 shares owned by Mr. Landy’s wife, (b) and 28,939 shares in custodial accounts for Mr. Landy’s minor children under the NJ Uniform Transfers to Minors Act in which he disclaims any beneficial interest but has power to vote.  Excludes 10,000 shares issuable upon exercise of  a stock option, which stock option is not exercisable until July 16, 2008.



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(7)

Includes 135,869 shares held by Mitchell Partners in which Mr. Mitchell has a beneficial interest.

(8)

Includes 50,563 shares owned by Mr. Molke’s wife.

  (9)

Includes 56,878 shares held by Rothenberg Investments, Ltd. in which Dr. Rothenberg has a beneficial interest.

  (10)

Includes shares in custodial accounts for Mr. Wolgin’s minor children under the NJ Uniform Transfers to Minors Act in which he disclaims any beneficial interest but has power to vote.

Item 13 – Certain Relationships and Related Transactions, and Director Independence


Certain relationships and related party transactions are incorporated herein by reference to Part IV, Item 15(a)(1)(vi), Note 8 of the Notes to Consolidated Financial Statements – Related Party Transactions.


See identification of independent directors under Item 10 and committee members under Item 11.


The Board of Directors approves all related party transactions.


Item 14 – Principal Accounting Fees and Services


KPMG LLP (KPMG) served as the Company’s independent registered public accountants for the first quarter of fiscal 2005.  The following are the fees billed by KPMG in connection with services rendered:


 

2007

 

2006

    

Audit Fees

$-0-

 

$-0-

Audit Related Fees

10,000

 

17,500

Tax Fees

-0-

 

-0-

All Other Fees

-0-

 

-0-

    Total Fees

$10,000

 

$17,500


Audit related fees include charges for issuing consents in connection with the filing of the Company’s Annual Report on Form 10-K and the filing of a registration statement for the Company’s Dividend Reinvestment and Stock Purchase Plan.  


Reznick Group (Reznick) served as the Company’s independent registered public accountants for the years ended December 31, 2007 and 2006.  The following are fees billed by and accrued to Reznick in connection with services rendered:


 

2007

 

2006

    

Audit Fees

$130,000

 

$116,000

Audit Related Fees

-0-

 

-0-

Tax Fees

45,000

 

44,000

All Other Fees

-0-

 

-0-

    Total Fees

$175,000

 

$160,000


Audit fees include professional services rendered for the audit of the Company’s annual financial statements, management’s assessment of internal controls, and reviews of financial statements included in the Company’s quarterly reports on Form 10-Q.  




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Audit related fees include services that are normally provided by the Company’s independent registered public accounting firm in connection with statutory and regulatory filings, such as consents and assistance with and review of documents filed with the Securities and Exchange Commission.


Tax fees include professional services rendered for the preparation of the Company’s federal and state corporate tax returns and supporting schedules as may be required by the Internal Revenue Service and applicable state taxing authorities.  Tax fees also include other work directly affecting or supporting the payment of taxes, including planning and research of various tax issues.


Audit Committee Pre-Approval Policy


The Audit Committee has adopted a policy for the pre-approval of audit and permitted non-audit services provided by the Company’s principal independent registered public accounting firm.  The policy requires that all services provided by our principal independent registered public accounting firm to the Company, including audit services, audit-related services, tax services and other services, must be pre-approved by the Committee.  The pre-approval requirements do not prohibit day-to-day normal tax consulting services, which matters will not exceed $10,000 in the aggregate.  


The Audit Committee has determined that the provision of the non-audit services described above is compatible with maintaining Reznick’s independence.




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PART IV


Item 15 – Exhibits, Financial Statement Schedules

 

(a) (1)

The following Financial Statements are filed as part of this report.

 
  

Page(s)

   

(i) (a)

Report of Independent Registered Public Accounting Firm

44

   

(ii)

Consolidated Balance Sheets as of December 31, 2007

and 2006

45

   

(iii)

Consolidated Statements of Income for the years

ended December 31, 2007, 2006, and 2005


46

   

(iv)

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2007, 2006 and 2005


47-48

   

(v)

Consolidated Statements of Cash Flows for the years

ended December 31, 2007, 2006 and 2005


49

   

(vi)

Notes to Consolidated Financial Statements

50-68

   

(a) (2)

The following Financial Statement Schedule for the

years ended December 31, 2007, 2006 and 2005 is

filed as part of this report



   

(i)

Schedule III – Real Estate and Accumulated Depreciation

69-72


All other schedules are omitted for the reason that they are not required, are not applicable, or the required information is set forth in the consolidated financial statements or notes thereto.


(a) (3)  The Exhibits set forth in the following index of Exhibits are filed as part of this Report.


Exhibit No.

Description

  

(2)

Agreement and Plan of Merger dated as of June 23, 2003.  (incorporated by reference from the Company’s Definitive Proxy Statement as filed with the Securities and Exchange Commission on July 10, 2003, Registration No. 001-12690).

  

(3)

Articles of Incorporation and By-Laws:

 

(3.1) Articles of Incorporation of UMH Properties, Inc., a Maryland corporation (incorporated by reference from the Company’s Definitive Proxy Statement as filed with the Securities and Exchange Commission on July 10, 2003, Registration No. 001-12690).


(3.2)    Bylaws of UMH Properties, Inc. (incorporated by reference from the Company’s Definitive Proxy Statement as filed with the Securities and Exchange Commission on July 10, 2003, Registration No. 001-12690).

  

(10)

Material Contracts:

 

(10.1)  2003 Stock Option Plan (incorporated by reference from the Company’s Definitive Proxy Statement as filed with the Securities and Exchange Commission on July 10, 2003, Registration No. 001-12690).

  



-42-






Exhibit No.

Description

  
 

(10.2)  401(k) Plan Document and Adoption Agreement effective April 1, 1992 (incorporated by reference from the Company’s 1992 Form 10-K as filed with the Securities and Exchange Commission on March 9, 1993).

  
 

(10.3)  Employment contract with Mr. Eugene W. Landy dated December 14, 1993 (incorporated by reference from the Company’s 1993 Form 10-K as filed with the Securities and Exchange Commission on March 28, 1994).

  
 

(10.4)  Amendment to employment contract with Mr. Eugene W. Landy effective January 1, 2004 (incorporated by reference from the Company’s 2004 Form 10-K/A as filed with the Securities and Exchange Commission on March 30, 2005, Registration No. 001-12690).

  
 

(10.5)  Employment contract with Mr. Ernest V. Bencivenga dated November 9, 1993 (incorporated by reference from the Company’s 1993 Form 10-K as filed with the Securities and Exchange Commission on March 28, 1994).

  
 

(10.6)  Employment contract with Mr. Samuel A. Landy effective January 1, 2005 (incorporated by reference from the Company’s 2005 Form 10-K as filed with the Securities and Exchange Commission on March 9, 2006, Registration No. 001-12690).

  
 

(10.7)  Employment contract with Ms. Anna T. Chew effective January 1, 2006 (incorporated by reference from the Company’s 2006 Form 10-K as filed with the Securities and Exchange Commission on March 13, 2007, Registration No. 001-12690).

  

(14)

Code of Business Conduct and Ethics (incorporated by reference from the Company’s 2003 Form 10-K as filed with the Securities and Exchange Commission on March 11, 2004, Registration No. 001-12690).

  

(21)

Subsidiaries of the Registrant:

  
 

The Company operates through nine wholly-owned multiple Subsidiaries carrying on the same line of business.  The parent company of these subsidiaries is the Registrant.  The line of business is the operation of manufactured home communities.

  

(23)

Consent of Reznick Group.

  

(31.1)

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  

(31.2)

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  

(32)

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

(99)

Audit Committee Charter





-43-





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and

Shareholders of UMH Properties, Inc.


We have audited the accompanying consolidated balance sheets of UMH Properties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007.  Our audits also included the financial statement schedule of real estate and accumulated depreciation.  UMH Properties, Inc.’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UMH Properties, Inc. as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), UMH Properties, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2008 expressed an unqualified opinion.



/s/ Reznick Group, P.C.

  
  

Baltimore, Maryland

March 10, 2008

 
  




-44-





UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

               

- ASSETS -

2007

 

2006

    

INVESTMENT PROPERTY AND EQUIPMENT

   

  Land

$ 13,300,614

 

$ 13,300,614

  Site and Land Improvements

84,949,200

 

77,302,816

  Buildings and Improvements

3,924,696

 

3,747,108

  Rental Homes and Accessories

14,206,317

 

10,788,686

Total Investment Property

116,380,827

 

105,139,224

  Equipment and Vehicles

7,320,666

 

7,017,268

Total Investment Property and Equipment

123,701,493

 

112,156,492

  Accumulated Depreciation

             (49,449,373)

 

            (46,430,040)

Net Investment Property and Equipment

74,252,120

 

65,726,452

    

OTHER ASSETS

   

  Cash and Cash Equivalents

2,221,976

 

2,005,027

  Securities Available for Sale

23,523,231

 

17,908,595

  Inventory of Manufactured Homes

10,853,824

 

8,970,367

  Notes and Other Receivables, net

20,756,996

 

16,836,228

  Unamortized Financing Costs

541,360

 

390,792

  Prepaid Expenses

574,759

 

688,941

  Land Development Costs

3,779,197

 

3,214,042

Total Other Assets

62,251,343

 

50,013,992

    

  TOTAL ASSETS

$136,503,463

 

$115,740,444

    

- LIABILITIES AND SHAREHOLDERS’ EQUITY -

   

LIABILITIES:

   

MORTGAGES PAYABLE

$ 61,749,700

 

$ 46,817,633

OTHER LIABILITIES

   

  Accounts Payable

613,339

 

927,734

  Loans Payable

17,022,753

 

8,103,106

  Accrued Liabilities and Deposits

2,590,338

 

1,769,774

  Tenant Security Deposits

532,200

 

481,778

   Total Other Liabilities

20,758,630

 

11,282,392

  Total Liabilities

82,508,330

 

58,100,025

    

COMMITMENTS AND CONTINGENCIES

   
    

SHAREHOLDERS’ EQUITY:

   

  Common Stock - $.10 par value per share,  20,000,000 shares authorized; 10,737,206 and 10,318,940 shares issued and outstanding as of December 31, 2007 and  2006, respectively

1,073,721

 

1,031,894

   Excess Stock - $.10 par value per share, 3,000,000 shares

     authorized; no shares issued or outstanding

-0-

 

-0-

  Additional Paid-In Capital

54,631,309

 

56,891,428

  Accumulated Other Comprehensive Income

(1,042,104)

 

384,890

  Undistributed Income  

(667,793)

 

(667,793)

  Total Shareholders’ Equity

53,995,133

 

57,640,419

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$136,503,463

 

$115,740,444


See Accompanying Notes to Consolidated Financial Statements



-45-





UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005



 

2007

 

2006

 

2005

      

REVENUES:

     
      

Rental and Related Income

      $ 23,997,178

 

       $ 23,186,485

 

$ 22,280,917

Sales of Manufactured Homes

       12,672,844

 

       15,799,748

 

       12,436,980

Interest and Dividend Income

         3,357,524

 

         3,156,255

 

         3,224,679

(Loss) Gain on Securities Transactions, net

        (1,398,377)

 

            266,847

 

         1,232,834

Other Income

            211,532

 

            235,275

 

            164,163

      

Total Revenues

       38,840,701

 

       42,644,610

 

       39,339,573

      
      

EXPENSES:

     

  Community Operating Expenses

       12,633,042

 

       12,274,363

 

       11,773,859

  Cost of  Sales of  Manufactured Homes

       10,371,404

 

       12,433,851

 

         9,963,689

  Selling Expenses

         1,712,257

 

         2,258,746

 

         1,894,274

  General and Administrative

         3,583,594

 

         3,068,275

 

         2,943,797

  Interest Expense

         4,171,109

 

         3,273,720

 

         2,200,765

  Depreciation Expense

         3,658,236

 

         3,415,570

 

         3,353,896

  Amortization of Financing Costs

            177,636

 

            238,211

 

            262,440

      

Total Expenses

       36,307,278

 

       36,962,736

 

       32,392,720

      
      

Income Before Gain on Sales of

    Investment Property and Equipment

         2,533,423

 

         5,681,874

 

         6,946,853

 Gain on Sales of Investment Property and    

    Equipment

              99,318

 

            158,403

 

              43,489

      

Net Income

         $ 2,632,741

 

        $ 5,840,277

 

      $  6,990,342

      

Net Income Per Share -

     

  Basic

        $           .25

 

        $           .58

 

 $            .74

  Diluted

        $           .25

 

        $           .58

 

 $            .74

      

Weighted Average Shares

     

  Outstanding:

     

    Basic

       10,535,162

 

       10,093,546

 

         9,473,155

    Diluted

       10,539,269

 

       10,110,567

 

         9,504,449



See Accompanying Notes to Consolidated Financial Statements



-46-





UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005


       

Accumulated

     

Additional

 

Other

 

Common Stock Issued

 

Paid-In

 

Comprehensive

 
 

Number

 

Amount

 

Capital

 

Income

        

Balance December 31, 2004

9,261,080

 

$926,108

 

$45,962,116

 

$3,142,945

        

Common Stock Issued with the DRIP*

407,859

 

40,786

 

7,136,986

 

-0-

Common Stock Issued through the   

  Exercise of Stock Options

138,000

 

13,800

 

1,253,113

 

-0-

Distributions

-0-

 

-0-

 

(844,941)

 

-0-

Stock Compensation Expense

-0-

 

-0-

 

102,580

 

-0-

Net Income

-0-

 

-0-

 

-0-

 

-0-

Unrealized Net Holding Loss on

    Securities  Available for Sale

   Net of Reclassification Adjustment

           -0-

 

           -0-

 

           -0-

 

(2,226,376)

        

Balance December 31, 2005

9,806,939

 

980,694

 

53,609,854

 

916,569

        

Common Stock Issued with the DRIP*

474,001

 

47,400

 

6,865,030

 

-0-

Common Stock Issued through the   

  Exercise of Stock Options

38,000

 

3,800

 

403,813

 

-0-

Distributions

-0-

 

-0-

 

(4,117,554)

 

-0-

Stock Compensation Expense

-0-

 

-0-

 

130,285

 

-0-

Net Income

-0-

 

-0-

 

-0-

 

-0-

Unrealized Net Holding Loss on

    Securities  Available for Sale

   Net of Reclassification Adjustment

           -0-

 

           -0-

 

           -0-

 

(531,679)

        

Balance December 31, 2006

10,318,940

 

1,031,894

 

56,891,428

 

384,890

        

Common Stock Issued with the DRIP*

399,454

 

39,946

 

5,266,116

 

-0-

Common Stock Issued through the   

  Exercise of Stock Options

18,812

 

1,881

 

252,240

 

-0-

Distributions

-0-

 

-0-

 

(7,910,861)

 

-0-

Stock Compensation Expense

-0-

 

-0-

 

132,386

 

-0-

Net Income

-0-

 

-0-

 

-0-

 

-0-

Unrealized Net Holding Loss on

    Securities  Available for Sale

   Net of Reclassification Adjustment

           -0-

 

           -0-

 

           -0-

 

(1,426,994)

        

Balance December 31, 2007

10,737,206

 

$1,073,721

 

$54,631,309

 

($1,042,104)

        


*Dividend Reinvestment and Stock Purchase Plan


See Accompanying Notes to Consolidated Financial Statements



-47-





UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME, CONTINUED

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005



  

Undistributed

    
  

Income

    
  

(Accumulated

 

Treasury

 

Comprehensive

  

Deficit)

 

Stock

 

Income

       

Balance December 31, 2004

 

$784,073

 

 ($2,010,499)

  
       

Common Stock Issued with the DRIP*

 

-0-

 

2,010,499

  

Common Stock Issued through the

   Exercise of Stock Options

 

-0-

 

-0-

  

Distributions

 

(8,442,208)

 

-0-

  

Stock Compensation Expense

 

-0-

 

-0-

  

Net Income

 

6,990,342

 

-0-

 

$6,990,342

Unrealized Net Holding Loss on

   Securities Available for Sale

   Net of Reclassification Adjustment

 

           -0-

 

           -0-

 

(2,226,376)

       

Balance December 31, 2005

 

(667,793)

 

           -0-

 

$4,763,966

       

Common Stock Issued with the DRIP*

 

-0-

 

-0-

  

Common Stock Issued through the

   Exercise of Stock Options

 

-0-

 

-0-

  

Distributions

 

(5,840,277)

 

-0-

  

Stock Compensation Expense

 

-0-

 

-0-

  

Net Income

 

5,840,277

 

-0-

 

$5,840,277

Unrealized Net Holding Loss on

   Securities Available for Sale

   Net of Reclassification Adjustment

 

           -0-

 

           -0-

 

(531,679)

       

Balance December 31, 2006

 

(667,793)

 

            -0-

 

$5,308,598

       

Common Stock Issued with the DRIP*

 

-0-

 

-0-

  

Common Stock Issued through the

   Exercise of Stock Options

 

-0-

 

-0-

  

Distributions

 

(2,632,741)

 

-0-

  

Stock Compensation Expense

 

-0-

 

-0-

  

Net Income

 

2,632,741

 

-0-

 

$2,632,741

Unrealized Net Holding Loss on

   Securities Available for Sale

   Net of Reclassification Adjustment

 

-0-

 

           -0-

 

(1,426,994)

       

Balance December 31, 2007

 

($667,793)

 

$            -0-

 

$1,205,747

       


*Dividend Reinvestment and Stock Purchase Plan.


See Accompanying Notes to Consolidated Financial Statements



-48-





UMH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005



 

2007

 

2006

 

2005

      

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net Income

 $         2,632,741

 

          $  5,840,277

 

 $  6,990,342

    Depreciation

3,658,236

 

3,415,570

 

3,353,896

    Amortization of Financing Costs

177,636

 

238,211

 

262,440

    Stock Compensation Expense

132,386

 

130,285

 

102,580

    Provision for Uncollectible Notes and Other Receivables

360,351

 

599,634

 

571,216

    Loss (Gain) on Securities Transactions, net

1,398,377

 

(266,847)

 

(1,232,834)

    Gain on Sales of Investment Property & Equipment

(99,318)

 

(158,403)

 

(43,489)

Changes in Operating Assets and Liabilities -

     

    Inventory of Manufactured Homes

(1,883,457)

 

(816,751)

 

(2,963,151)

    Notes and Other Receivables

(4,281,119)

 

(4,299,506)

 

(4,601,270)

    Prepaid Expenses

114,182

 

(81,326)

 

59,675

    Accounts Payable

(314,395)

 

(303,410)

 

646,468

    Accrued Liabilities and Deposits

820,564

 

(125,188)

 

(78,315)

    Tenant Security Deposits

50,422

 

(10,608)

 

(32,860)

Net Cash Provided by Operating Activities

2,766,606

 

4,161,938

 

3,034,698

      

CASH FLOWS FROM INVESTING ACTIVITIES:

     

   Purchase of Manufactured Home Community

-0-

 

(5,218,480)

 

-0-

   Purchase of Land

-0-

 

-0-

 

(3,661,555)

   Purchase of Investment Property and Equipment

(6,969,457)

 

(2,535,450)

 

(3,530,015)

   Proceeds from Sales of Investment Property

      and Equipment

941,256

 

936,633

 

444,011

   Additions to Land Development Costs

(6,621,540)

 

(4,211,146)

 

(2,885,127)

   Purchase of Securities Available for Sale

(12,738,845)

 

(1,901,930)

 

(11,309,592)

   Proceeds from Sales of Securities Available for Sale

4,298,838

 

10,338,841

 

7,526,790

Net Cash Used by Investing Activities

(21,089,748)

 

(2,591,532)

 

(13,415,488)

      

CASH FLOWS FROM FINANCING ACTIVITIES:

     

   Proceeds from Mortgages

21,919,000

 

-0-

 

-0-

   Net Proceeds from (Payments on) Short-Term Borrowings

8,919,647

 

4,609,372

 

6,842,675

   Principal Payments of Mortgages and Loans

(6,986,933)

 

(6,013,352)

 

(1,795,002)

   Financing Costs on Debt

(328,204)

 

(78,967)

 

(54,374)

   Proceeds from Issuance of Common Stock

3,465,535

 

5,129,253

 

7,257,099

   Proceeds from Exercise of Stock Options

254,121

 

407,613

 

1,266,913

   Dividends Paid, net of Reinvestments

(8,703,075)

 

(8,174,654)

 

(7,355,977)

   Net Cash Provided (Used) by Financing Activities

18,540,091

 

(4,120,735)

 

6,161,334

      

NET (DECREASE) INCREASE IN CASH

216,949

 

(2,550,329)

 

(4,219,456)

CASH & CASH EQUIVALENTS – BEGINNING

2,005,027

 

4,555,356

 

8,774,812

CASH & CASH EQUIVALENTS – ENDING

 $         2,221,976

 

 $  2,005,027

 

 $  4,555,356


See Accompanying Notes to Consolidated Financial Statements



-49-





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 – ORGANIZATION, ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST


UMH Properties, Inc. (the Company) owns and operates twenty-eight manufactured home communities containing approximately 6,800 sites.  The communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee.


The Company has elected to be taxed as a real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code (the Code), and intends to maintain its qualification as a REIT in the future.  As a qualified REIT, with limited exceptions, the Company will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders.  For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code.  The Company is subject to franchise taxes in some of the states in which the Company owns property.


The Company was incorporated in the state of New Jersey in 1968.  On September 29, 2003, the Company changed its state of incorporation from New Jersey to Maryland.  


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Description of the Business


The Company owns and operates twenty-eight manufactured home communities containing approximately 6,800 sites.  These communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee.


These manufactured home communities are listed by trade names as follows:


MANUFACTURED HOME COMMUNITY

          LOCATION

  

Allentown

Memphis, Tennessee

Brookview Village

Greenfield Center, New York

Cedarcrest

Vineland, New Jersey

Cranberry Village

Cranberry Township, Pennsylvania

Cross Keys Village

Duncansville, Pennsylvania

D& R Village

Clifton Park, New York

Fairview Manor

Millville, New Jersey

Forest Park Village

Cranberry Township, Pennsylvania

Heather Highlands

Inkerman, Pennsylvania

Highland Estates

Kutztown, Pennsylvania

Kinnebrook

Monticello, New York

Lake Sherman Village

Navarre, Ohio

Laurel Woods

Cresson, Pennsylvania

Memphis Mobile City

Memphis, Tennessee

Oxford Village

West Grove, Pennsylvania

Pine Ridge Village/Pine Manor

Carlisle, Pennsylvania

Pine Valley Estates

Apollo, Pennsylvania

Port Royal Village

Belle Vernon, Pennsylvania

River Valley Estates

Marion,  Ohio

Sandy Valley Estates

Magnolia, Ohio

Southwind Village

Jackson, New Jersey

Somerset Estates/Whispering Pines

Somerset, Pennsylvania

Spreading Oaks Village

Athens, Ohio

Waterfalls Village

Hamburg, New York

Weatherly Estates

Lebanon, Tennessee

Woodlawn Manor

West Monroe, New York

Woodlawn Village

Eatontown, New Jersey

Wood Valley

Caledonia, Ohio



-50-









Effective April 1, 2001, the Company, through its wholly-owned taxable REIT subsidiary, UMH Sales and Finance, Inc., (S&F), began to conduct manufactured home sales and the financing of these sales in its communities.  Inherent in the operation of manufactured home communities is site vacancies.  S&F was established to fill these vacancies and potentially enhance the value of the communities.


Basis of Presentation


The Company’s subsidiaries are all 100% wholly-owned.  The consolidated financial statements of the Company include all of these subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.  The Company does not have a majority or minority interest in any other Company, either consolidated or unconsolidated.  


Use of Estimates


In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as contingent assets and liabilities as of the dates of the consolidated balance sheets and revenue and expenses for the years then ended.  Actual results could differ significantly from these estimates and assumptions.


Investment Property and Equipment and Depreciation


Property and equipment are carried at cost.  Depreciation for Sites and Building (15 to 27.5 years) is computed principally on the straight-line method over the estimated useful lives of the assets.  Depreciation of Improvements to Sites and Buildings, Rental Homes and Equipment and Vehicles (3 to 27.5 years) is computed principally on the straight-line method.  Land Development Costs are not depreciated until they are put in use, at which time they are capitalized as Sites or Site Improvements.  Interest Expense pertaining to Land Development Costs are capitalized.  Maintenance and Repairs are charged to income as incurred and improvements are capitalized.  The costs and related accumulated depreciation of property sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in the current year’s results of operations.  If there is an event or change in circumstances that indicates that the basis of an investment property may not be recoverable, management assesses the possible impairment of value through evaluation of the estimated future cash flows of the property, on an undiscounted basis, as compared to the property’s current carrying value.  If a property is determined to be impaired, it will be recorded at fair value.


Unamortized Financing Costs


Costs incurred in connection with obtaining mortgages and other financings and refinancings are deferred and are amortized on a straight-line basis over the term of the related obligations, which is not materially different than the effective interest method.  Unamortized costs are charged to expense upon prepayment of the obligation.  As of December 31, 2007 and 2006, accumulated amortization amounted to $848,405 and $670,769, respectively.  The Company estimates that aggregate amortization expense will be approximately $136,000 for 2008, $107,000 for 2009, $59,000 for 2010, $58,000 for 2011, and $37,000 for 2012.


Cash and Cash Equivalents


Cash and cash equivalents include bank repurchase agreements with original maturities of 90 days or less.  The Company maintains its cash in bank accounts in amounts that may exceed federally insured limits.  The Company has not experienced any losses in these accounts in the past and does not believe that it is exposed to significant credit risk.


Securities Available for Sale


The Company’s securities consist primarily of debt securities and common and preferred stock of other REITs.  These securities are all publicly-traded and purchased on the open market or through dividend reinvestment plans.  These securities are classified among three categories:  held-to-maturity, trading and available-for-sale.  As of December 31, 2007 and 2006, the Company’s securities are all classified as available-for-sale and are carried at



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fair value based upon quoted market prices.  Gains or losses on the sale of securities are based on identifiable cost and are accounted for on a trade date basis.  Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Shareholders’ Equity until realized.  A decline in the market value of any security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount to fair value.  Any impairment is charged to earnings and a new cost basis for the security established.


Derivative Instruments and Hedging Activities


The Company's primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows.  The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt.  The Company does not enter into derivative instruments for speculative purposes.  The Company has entered into three interest rate swap agreements.   


The interest rate swap agreements have the effect of fixing interest rates relative to specific mortgage loans as follows:


Mortgage

Due Date

Mortgage

Interest Rate

Effective Fixed Rate

Balance 12/31/2007

     

Cranberry Village

8/1/2008

LIBOR + 1.65%

5.17%

$1,839,464

Forest Park Village

8/1/2008

LIBOR + 1.65%

5.17%

2,943,142

Various

11/19/2009

LIBOR + 1.75%

5.82%

13,334,033

    


$18,116,639


Each of the Company's interest rate swaps is based upon 30-day LIBOR.  The scheduled maturity dates, payment dates and the notional amounts of the interest rate swap agreements coincide with those of the underlying mortgages.


These interest rate swaps do not qualify for hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities”, as amended and, therefore, resulted in all fair value adjustments to the carrying value of the derivatives being recorded as a component of current period earnings.  The Company has recorded as an addition to (deduction from) interest expense, non-cash fair value adjustments of $467,161, $67,655 and ($773,894) for the years ended December 31, 2007, 2006 and 2005, respectively, based upon the change in fair value of the Company’s interest rate swaps.  The recorded (liability) asset at December 31, 2007 and 2006 amounted to ($63,731) and $403,430, respectively.  These non-cash valuation adjustments will only be settled for cash if the Company terminates the swaps prior to maturity.


The Company also invests in futures contracts of ten-year treasury notes to reduce exposure of the debt securities portfolio to market rate fluctuations.  These futures contracts do not qualify for hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and No. 149.  The contracts are marked-to-market and the unrealized gain or loss is recorded in the income statement in gain on securities transactions, net with corresponding amounts recorded in other assets or other liabilities on the balance sheet.  Gain or loss on settled futures contracts are also recorded as a component of gain on securities transactions, net.


Inventory of Manufactured Homes


Inventory of manufactured homes is valued at the lower of cost or market value and is determined by the specific identification method.  All inventory is considered finished goods.


Accounts, Notes and Other Receivables


The Company’s accounts, notes and other receivables are stated at their outstanding balance reduced by an allowance for uncollectible accounts.  The Company evaluates the recoverability of its receivables whenever events



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occur or there are changes in circumstances such that management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan or lease agreements.  The collectibility of loans is measured based on the present value of the expected future cash flow discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  At December 31, 2007 and 2006, the reserves for uncollectible accounts, notes and other receivables were $1,492,651 and $1,427,900, respectively.  For the years ended December 31, 2007, 2006 and 2005, the provisions for uncollectible notes and other receivables were $360,351, $599,634 and $571,216, respectively.  Charge-offs for the years ended December 31, 2007, 2006 and 2005 amounted to $295,600, $238,549 and $268,942, respectively.


The Company’s notes receivable primarily consists of installment loans collateralized by manufactured homes with principal and interest payable monthly.  Interest rates on these loans range from 4% to 14%.  The average maturity is approximately 11 years.  


Revenue Recognition


The Company derives its income primarily from the rental of manufactured home sites.  The Company also owns approximately 560 rental units which are rented to residents.  Rental and related income is recognized on the accrual basis.


Sale of manufactured homes is recognized on the full accrual basis when certain criteria are met.  These criteria include the following:  (a) initial and continuing payment by the buyer must be adequate:  (b) the receivable, if any, is not subject to future subordination; (c) the benefits and risks of ownership are substantially transferred to the buyer; and (d) the Company does not have a substantial continued involvement with the home after the sale.  Alternatively, when the foregoing criteria are not met, the Company recognizes gains by the installment method.  Interest income on loans receivable is not accrued when, in the opinion of management, the collection of such interest appears doubtful.


Net Income Per Share


Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period (10,535,162, 10,093,546 and 9,473,155 in 2007, 2006 and 2005, respectively).  Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that would be issued upon exercise of stock options pursuant to the treasury stock method (10,539,269, 10,110,567 and 9,504,449 in 2007, 2006 and 2005, respectively) (See Note 6).  Options in the amount of 4,107, 17,021 and 31,294 for 2007, 2006, and 2005, respectively, are included in the diluted weighted average shares outstanding.


Stock Option Plans


The Company accounts for stock options in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R).  The Company has selected the prospective method of adoption under the provisions of SFAS No. 148, “Accounting for Stock Based Compensation, Transition and Disclosure”.  SFAS 123R requires that compensation cost for all stock awards be calculated and amortized over the service period (generally equal to the vesting period).  This compensation cost is determined using option pricing models, intended to estimate the fair value of the awards at the grant date.  Compensation costs of $132,386, $130,285 and $102,580 have been recognized in 2007, 2006 and 2005, respectively.  Included in Note 6 to these consolidated financial statements are the assumptions and methodology.


Comprehensive Income


Comprehensive income is comprised of net income and other comprehensive income (loss).  Other comprehensive income (loss) includes items that are otherwise recorded directly in equity, such as changes in unrealized gains or losses on securities available for sale.  Comprehensive income is presented in the consolidated statements of shareholders’ equity.




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Reclassification


Certain amounts in the financial statements for the prior years have been reclassified to conform to the statement presentation for the current year.


New Accounting Pronouncements


In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48).  FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.


We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions but, as a REIT, we generally do not pay tax on our net income distributed as dividends to our shareholders. Our taxable subsidiary does not join in our consolidated REIT tax filings and as such is itself subject to federal income tax as well as income tax in multiple state and local jurisdictions. As required, we adopted FIN 48 effective January 1, 2007 and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48.


        In 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), SFAS 157 defines fair value, established a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value.  SFAS 157 does not expand or require any new fair value measures, however the application of this statement may change current practice.   The requirements of SFAS 157 are first effective for our fiscal year beginning January 1, 2008.  However, in February 2008 the FASB decided that an entity need not apply this standard to non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year.  Accordingly, our adoption of this standard on January 1, 2008 is limited to financial assets and liabilities and we are currently assessing what impact, if any, the adoption of SFAS 157 will have on our financial position and results of operations.

        In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (SFAS 159).  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, with few exceptions.  SFAS 159 also established presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for our fiscal year beginning January 1, 2008. We do not believe that the adoption of this statement will have a material effect on our financial condition or results of operations.


NOTE 3 – INVESTMENT PROPERTY AND EQUIPMENT


On March 10, 2006, the Company acquired (at auction) Weatherly Estates I, a 270-space manufactured home community in Lebanon, Tennessee, from Affordable Residential Communities Inc., an unrelated entity.  The total purchase price was approximately $5,200,000.  




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The following is a summary of accumulated depreciation by major classes of assets:


 

December 31, 2007

 

December 31, 2006

    

Site and Land Improvements

$ 38,474,110

 

$ 36,237,301

Buildings and Improvements

2,057,355

 

1,963,878

Rental Homes and Accessories

3,390,920

 

3,338,859

Equipment and Vehicles

5,526,988

 

4,890,002

    

Total Accumulated Depreciation

$ 49,449,373

 

$ 46,430,040


NOTE 4 – SECURITIES AVAILABLE FOR SALE


The Company’s securities available for sale consist primarily of debt securities and common and preferred stock of other REITs.  The Company does not own more than 10% of the outstanding shares of any of these securities, nor does it have controlling financial interest.


The following is a listing of securities available for sale at December 31, 2007:


  

Series

Interest

Rate

Number of

Shares

 

 Cost

 

Market Value

         

Debt Securities:

       
         
 

Monmouth Capital Corporation *

       
 

   Convertible Subordinated Debentures

        Matures 10/23/2013

 

8.000%

 1,000,000

$

  1,000,000

$

   1,000,000

 

   Convertible Subordinated Debentures

        Matures 3/30/2015

 

8.000%

 5,000,000

 

   5,000,000

 

   5,000,000

         
 

Total Debt Securities

   

   

   6,000,000

 

   6,000,000

         

Equity Securities:

       
         
 

Preferred Stock:

       
         
 

 American Land Lease, Inc.

 A

7.75%

      41,800

 

   1,045,580

 

      758,670

 

 Apartment Investment & Management Co.

 G

9.38%

        8,000

 

      185,788

 

      195,200

 

 BRE Properties, Inc.

 C

6.75%

        1,000

 

        25,000

 

        19,550

 

 Developers Diversified Realty Corporation

 H

7.38%

        5,000

 

      125,000

 

      102,500

 

 Developers Diversified Realty Corporation

 I

7.50%

        4,000

 

      100,000

 

        82,960

 

 Felcor Lodging Trust Incorporated

 C

8.00%

      15,000

 

      361,107

 

      280,348

 

 HCP, Inc.

 E

7.25%

        8,000

 

      200,000

 

      156,881

 

 HRPT Properties Trust

 B

8.75%

        2,335

 

        58,375

 

        58,282

 

 iStar Financial Inc.

 E

7.88%

        6,100

 

      152,502

 

      119,072

 

 LaSalle Hotel Properties

 D

7.50%

        8,000

 

      200,004

 

      145,200

 

 Lexington Realty Trust

 B

8.05%

      18,000

 

      450,000

 

      375,300

 

 Maguire Properties, Inc.

 A

7.63%

        5,000

 

        69,700

 

        69,700

 

 Mid-America Apartment Communities, Inc.

 H

8.30%

        2,500

 

        63,625

 

        59,925

         
 

 Total Preferred Stock

    

   3,036,681

 

   2,423,588

         



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Series

Interest

Rate

Number of

Shares

 

 Cost

 

Market Value

         
 

Common Stock:

       
         
 

 Champion Enterprises

  

      40,000

 

      409,986

 

      376,800

 

 Fleetwood Enterprises

  

      90,000

 

      538,200

 

      538,200

 

 Monmouth Real Estate Corporation *

  

 1,487,105

 

 12,394,254

 

 12,045,549

 

 Nobility Homes, Inc.

  

      20,000

 

      412,120

 

      365,000

 

 Sun Communities, Inc.

  

      84,200

 

   1,774,094

 

   1,774,094

         
 

Total Common Stock

   

   

 15,528,654

   

 15,099,643

         
 

Total Equity Securities

    

 18,565,335

 

 17,523,231

         
 

Total Securities Available for Sale

  

   

$

 24,565,335

$

23,523,231



The following is a listing of securities available for sale at December 31, 2006:


  

Series

Interest

Rate

Number of

Shares

 

 Cost

 

Market Value

         

Debt Securities:

       
         
 

Monmouth Capital Corporation *

       
 

   Convertible Subordinated Debentures

        Matures 10/23/2013

 

8.000%

 1,000,000

$

  1,000,000

$

   1,000,000

 

   Convertible Subordinated Debentures

        Matures 3/30/2015

 

8.000%

 5,000,000

 

   5,000,000

 

   5,000,000

         
 

Total Debt Securities

   

   

   6,000,000

 

   6,000,000

         

Equity Securities:

       
         
 

Preferred Stock:

       
         
 

Alexandria Real Estate Equities, Inc.

B

9.100%

        4,000

 

      100,000

 

      100,360

 

American Land Lease

A

7.750%

      41,800

 

   1,045,580

 

   1,059,630

 

Apartment Investment & Management Co.

G

9.375%

        8,000

 

      185,788

 

      210,400

 

BRE Properties, Inc.

C

6.750%

        3,000

 

        75,000

 

        75,420

 

CBL & Associates Properties, Inc.

C

7.750%

        2,000

 

        50,000

 

        51,320

 

Corporate Office Properties Trust

H

7.500%

        4,500

 

      112,500

 

      113,310

 

Developers Diversified Realty Corporation

F

8.600%

        4,000

 

      100,000

 

      101,560

 

Developers Diversified Realty Corporation

H

7.375%

      15,000

 

      375,000

 

      378,900

 

Developers Diversified Realty Corporation

I

7.500%

        4,000

 

      100,000

 

      101,680

 

Eagle Hospitality Properties Trust

A

8.250%

        4,000

 

      100,000

 

      102,040

 

Felcor Lodging Trust Incorporated

C

8.000%

      36,000

 

      868,835

 

      907,560

         



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Series

Interest

Rate

Number of

Shares

 

 Cost

 

Market Value

         
 

Health Care Property Investors, Inc.

E

7.250%

      10,000

 

      250,000

 

      255,600

 

Health Care REIT, Inc.

D

7.875%

        6,000

 

      150,000

 

      155,400

 

HRPT Properties Trust

B

8.750%

      17,000

 

      425,130

 

      437,070

 

iStar Financial Inc.

E

7.875%

      15,000

 

      375,005

 

      385,350

 

LaSalle Hotel Properties

D

7.500%

        8,000

 

      200,004

 

      202,080

 

LaSalle Hotel Properties

A

10.250%

      11,000

 

      281,835

 

      279,400

 

Lexington Corporate Properties Trust

B

8.050%

      20,000

 

      500,000

 

      510,320

 

Maguire Properties, Inc.

A

7.625%

        5,000

 

      125,000

 

      123,650

 

Mid-America Apartment Communities, Inc.

H

8.300%

      22,000

 

      559,900

 

      578,600

 

Mills Corporation

G

7.875%

      18,000

 

      450,000

 

      395,100

         
 

Total Preferred Stock

    

   6,429,577

 

   6,524,750


 

Common Stock:

       
         
 

Champion Enterprises, Inc.

  

      40,000

 

409,986

 

374,400

 

Fleetwood Enterprises, Inc.

  

    185,000

 

1,394,895

 

1,463,347

 

Mission West Properties, Inc.

  

      26,900

 

      271,958

 

      352,390

 

Monmouth Capital Corporation *

  

    102,811

 

      389,386

 

      557,238

 

Monmouth Real Estate Corporation *

  

      75,000

 

      581,256

 

      633,750

 

New Plan Excel Realty

  

      14,000

 

      373,037

 

      384,720

 

Sun Communities, Inc.

  

      50,000

 

   1,673,610

 

   1,618,000

         
 

Total Common Stock

   

   

   5,094,128

   

   5,383,845

         
 

Total Equity Securities

    

 11,523,705

 

 11,908,595

         
 

Total Securities Available for Sale

  

   

$

 17,523,705

$

 17,908,595


*  Related entity – See Note 8.


On July 31, 2007, Monmouth Real Estate Investment Corporation (MREIC) and Monmouth Capital Corporation (MCC), both related entities to the Company, completed a strategic combination whereby a wholly-owned subsidiary of MREIC merged with and into MCC, and MCC survived as a wholly-owned subsidiary of MREIC.  Each outstanding share of MCC’s common stock was converted into and exchanged for 0.655 shares of MREIC’s common stock.  At the time of the merger, the Company had 107,403 shares of MCC common stock which was converted and exchanged for 70,349 shares of MREIC’s common stock.  Additionally, the Company’s $1,000,000 investment in MCC’s outstanding 8% Convertible Subordinated Debentures due 2013 is now convertible into MREIC common stock at an adjusted conversion price of $9.16 per share.  The Company’s $5,000,000 investment in MCC’s outstanding 8% Convertible Subordinated Debentures due 2015 is now convertible into MREIC common stock at an adjusted conversion price of $11.45 per share.

On September 13, 2007, the Company purchased 1,000,000 shares of MREIC common stock from Palisade Concentrated Equity Partnership, L.P.(Palisade), an unrelated entity.  The total consideration for the purchase was $8,500,000.  On November 23, 2007, the Company purchased an additional 325,704 shares of MREIC common stock from Palisade for a total consideration of $2,768,484.  In addition to the convertible debentures, the Company now owns a total of 1,487,105 shares of MREIC common stock, representing 6.2% of the total shares outstanding at December 31, 2007.  



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The Company had fourteen securities that were temporarily impaired at December 31, 2007.  The Company considers many factors in determining whether a security is other than temporarily impaired, including the nature of the security and the cause, severity and duration of the impairment.  The following is a summary of temporarily impaired securities at December 31, 2007:


 

 Less Than 12 Months

 

 12 Months or Longer

 

 Fair

 

 Unrealized

 

 Fair

 

 Unrealized

 

 Value

 

 Loss

 

 Value

 

 Loss

        

Preferred Stock

    $2,158,688

 

$622,505

 

$-0-

 

$-0-

Common Stock

12,787,349

 

429,011

 

 -0-

 

 -0-

     Total

    $14,946,037

 

$1,051,516

 

$-0-

 

$-0-


The following is a summary of the range of the losses:


Number of

Individual Securities


Range of Loss


Time Period

   

4

Less than or equal to 10%

Less than 6 months

4

Less than or equal to 20%

Less than 6 months

6

Less than or equal to 30%

Less than 6 months


The Company normally holds REIT securities long term and has the ability and intent to hold securities to recovery.  


During the years ended December 31, 2007, 2006 and 2005, the Company received proceeds of $4,298,838, $10,338,841 and $7,526,790, on sales or redemptions of securities available for sale, respectively.  The Company recorded the following (Loss) Gain on Securities Transactions, net:


 

2007

 

2006

 

2005

      

Gross realized gains

    $    362,626

 

$ 1,029,759

 

$ 1,187,658

Gross realized losses

(98,951)

 

(74,048)

 

-0-

Net (loss) gain on closed futures contracts

        (704,509)

 

(29,443)

 

95,801

Unrealized gain (loss) on open futures contracts

             40,781

 

163,828

 

(50,625)

Impairment loss

        (998,324)

 

(823,249)

 

-0-

      

Total (Loss) Gain on Securities Transactions, net

($1,398,377)

 

$ 266,847

 

$ 1,232,834

      

The Company invests in futures contracts of ten-year treasury notes with the objective of reducing the exposure of the debt securities portfolio to market rate fluctuations.  At December 31, 2007, 2006 and 2005, the notional amount of these contracts was $9,000,000.  Changes in the market value of these derivatives have been recorded in gain on securities transactions, net with corresponding amounts recorded in other assets or other liabilities on the balance sheet.  The fair value of the derivatives at December 31, 2007, 2006 and 2005 was a gain (loss) of $40,781, $163,828 and ($50,625), respectively and is included in gain on securities transactions, net.  


During 2007, 2006 and 2005, the Company recorded a (loss) gain of ($704,509), ($29,443) and $95,801 on settled futures contracts, which is included in gain on securities transactions, net.  


During 2007 and 2006, the Company recognized a loss of $998,324 and $823,249, respectively, due to write-downs to the carrying value of securities available for sale which were considered other than temporarily impaired.  




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Dividend income for the years ended December 31, 2007, 2006 and 2005 amounted to $871,327, $1,129,800 and $1,333,985, respectively.  Interest income for the years ended December 31, 2007, 2006 and 2005 amounted to $2,486,197, $2,026,455 and $1,890,694, respectively.


The Company had margin loan balances of $5,530,942 and $3,259,796 at December 31, 2007 and 2006, respectively, which were collateralized by the Company’s securities portfolio.    Additionally, the Company also has a $2,500,000 loan with Two River Community Bank collateralized by the $5,000,000 Monmouth Capital Corporation 8% convertible subordinated debentures (See Note 5).



NOTE 5 – LOANS AND MORTGAGES PAYABLE


Loans Payable


The Company purchases securities on margin.  The interest rates charged on the margin loans at December 31, 2007 and 2006 was 6% and 7%, respectively.  These loans are due on demand.  At December 31, 2007 and 2006, the margin loans amounted to $5,530,942 and $3,259,796, respectively, and are collateralized by the Company’s securities portfolio.  The Company must maintain a coverage ratio of approximately 50%.


The Company has an $8,000,000 revolving credit agreement with GE Commercial Distribution Finance Corporation (GE) (formerly Transamerica Commercial Finance Corporation) to finance inventory purchases.  The interest rates range from prime (with a minimum of 6%) for each advance to prime plus 2% after one year.  The weighted average interest rate at December 31, 2007 and 2006 was 8.6% and 10.7%, respectively.  This agreement originally terminated April 25, 2003, but automatically renews on an annual basis.  Advances under this line of credit are secured by the manufactured homes for which the advances were made.  As of December 31, 2007 and 2006, the amount outstanding with GE was $5,991,811 and $3,089,278, respectively.


In November 2007, the Company obtained a $2,500,000 loan with Two River Community Bank.  The interest on this loan is 6.75%.  This loan is due on November 8, 2009.  Proceeds of this loan were used to purchase securities available for sale.  This loan is collateralized by the $5,000,000 Monmouth Capital Corporation 8% convertible subordinated debentures.


The Company also has miscellaneous loans payable for equipment and vehicles totaling $-0- and $4,032 at December 31, 2007 and 2006, respectively.

 

Unsecured Lines of Credit


During 2007, the Company modified its unsecured line of credit with Bank of America (formerly Fleet Bank).  The commitment amount was increased from $2,000,000 to $5,000,000.  The interest rate was modified from prime to LIBOR plus 150 basis points.  As of December 31, 2007 and 2006, $3,000,000 and $1,750,000, respectively, of this line of credit was utilized.  The interest rate charged at December 31, 2007 and 2006 was 6.43% and 8.25%, respectively.  This line of credit expires on June 30, 2008.


On April 15, 2007, the Company’s $15,000,000 line of credit with PNC Bank matured.




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Mortgages Payable


The following is a summary of mortgages payable:


 

At December 31, 2007

Balance at December 31,

Property

Due Date

 Interest Rate

2007

 

2006

      

Allentown

12/01/11

6.36%

$5,112,246

 

$5,240,029

Cranberry Village

08/01/08

LIBOR + 1.65%

1,839,464

 

1,952,070

D & R Village

05/01/08

4.625%

2,388,419

 

2,564,294

Fairview Manor

02/01/17

5.785%

11,353,202

 

3,514,183

Forest Park Village

08/01/08

LIBOR + 1.65%

2,943,142

 

3,123,312

Heather Highlands

08/28/18

Prime + .5%

2,806,252

 

2,973,520

Highland Estates

09/01/17

6.175%

10,402,086

 

-0-

Laurel Woods

01/10/07

LIBOR + 1.55%

-0-

 

1,509,074

Port Royal Village

04/01/12

7.36%

5,053,403

 

5,117,549

Sandy Valley

03/01/09

4.75%

2,825,496

 

3,009,865

Somerset Estates/Whispering Pines

02/26/19

8.04%

1,642,302

 

1,732,117

Waterfalls Village

01/01/08

4.625%

2,049,655

 

2,205,859

Various (4 properties)

11/19/09

LIBOR + 1.75%

13,334,033

 

13,875,761

      

Total Mortgages     

 Payable

 

$61,749,700

 

$46,817,633


At December 31, 2007 and 2006, mortgages were collateralized by real property with a carrying value of $70,634,226 and $58,288,033, respectively, before accumulated depreciation and amortization.  Interest costs amounting to $378,030, $225,800 and $167,400 were capitalized during 2007, 2006 and 2005, respectively, in connection with the Company’s expansion program.


Recent Financing


In October 2006, the Company extended its mortgage on Laurel Woods to January 10, 2007.  This mortgage was repaid in 2007.


On January 30, 2007, the Company obtained an $11,480,000 mortgage loan on Fairview Manor from Column Guaranteed LLC, a Credit Suisse company.  This mortgage payable is due on February 1, 2017 with interest at a fixed rate of 5.785%.  Proceeds from this mortgage were primarily used to pay off the existing mortgage on Fairview Manor and to pay down our margin loans and our lines of credit.


On August 2, 2007, the Company obtained a $10,439,000 mortgage loan on Highland Estates from Column Guaranteed LLC, a Credit Suisse company.  This mortgage payable is due on September 1, 2017 with interest at a fixed rate of 6.175%.  Proceeds from this mortgage were primarily used to pay down our margin loans and for other corporate purposes.


The aggregate principal payments of all mortgages payable are scheduled as follows:


2008

        $10,708,593

2009

          16,206,853

2010

              852,768

2011

            5,424,413

2012

               796,100

Thereafter

          27,760,973

 

             

Total

$61,749,700





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NOTE 6 – EMPLOYEE STOCK OPTIONS


On August 14, 2003, the shareholders approved and ratified the Company’s 2003 Stock Option Plan (the 2003 Plan) authorizing the grant to officers and key employees of options to purchase up to 1,500,000 shares of common stock.  All options are exercisable one year from the date of grant.  The option price shall not be below the fair market value at date of grant.  If options granted under the 2003 Plan expire or terminate for any reason without having been exercised in full, the Shares subject to, but not delivered under, such options shall become available for additional option grants under the 2003 Plan.  This Plan replaced the Company’s 1994 Stock Option Plan which, pursuant to its terms, terminated December 31, 2003.  The outstanding options under this plan remain outstanding until exercised, forfeited or expired.

The Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation” on January 1, 2003.  During the year ended December 31, 2007, fifteen employees were granted options to purchase a total of 108,000 shares.  The fair value of those options was approximately $139,000 based on assumptions noted below and is being amortized over the 1-year vesting period.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in the following years:

  

     2007

 

     2006

 

  2005

       
 

Dividend yield

6.54%

 

6.33%

 

6.35%

 

Expected volatility

18.09%

 

18.5%

 

19.04%

 

Risk-free interest rate

4.79%

 

4.63%

 

4.01%

 

Expected lives

             8

 

8

 

8


A summary of the status of the Company’s stock option plans as of December 31, 2007, 2006 and 2005 and changes during the years then ended are as follows:


 

2007

 

2006

 

2005

  

Weighted-

  

Weighted-

  

Weighted-

  

Average

  

Average

  

Average

  

Exercise

  

Exercise

  

Exercise

 

Shares

Price

 

Shares

Price

 

Shares

Price

         

Outstanding at beginning of year


348,000


$15.09

 


296,000


 $14.40

 


349,000


 $12.04

Granted

108,000

14.83

 

90,000

15.51

 

90,000

15.48

Exercised

(18,812)

13.51

 

(38,000)

10.73

 

(138,000)

9.18

Expired

(11,188)

15.10

 

        -0-

-0-

 

 (5,000)

13.05

Outstanding at end of year


426,000


15.10

 


348,000


15.09

 


296,000


14.40

Options exercisable at end of year


318,000

  


258,000

  


206,000

 

Weighted-average fair value of options granted during the year

 



1.29

  



1.44

  



1.33





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The following is a summary of stock options outstanding as of December 31, 2007:


Date of Grant

Number of Employees

Number of Shares

 


Option Price

Expiration Date

      

10/04/01

2

        6,000

 

10.60

10/04/09

01/04/02

1

  25,000

 

12.95

01/04/10

06/20/02

5

  13,000

 

12.60

06/20/10

08/18/03

1

25,000

 

16.92

08/18/11

08/25/03

7

26,000

 

15.00

08/25/11

01/16/04

1

25,000

 

18.62

01/16/12

07/06/04

7

30,000

 

13.05

07/06/12

02/01/05

1

43,600

 

15.62

02/01/13

02/01/05

1

6,400

 

17.19

02/01/13

07/18/05

9

34,000

 

15.05

07/18/13

01/09/06

1

44,200

 

15.62

01/09/14

01/09/06

1

5,800

 

17.21

01/09/14

07/21/06

9

34,000

 

15.15

07/21/14

01/03/07

1

44,200

*

15.51

01/03/15

01/03/07

1

5,800

*

17.06

01/03/15

07/19/07

12

51,000

*

14.21

07/16/15

09/20/07

2

7,000

*

13.19

09/20/15

      
  

426,000

   

* Unexercisable


During the year ended December 31, 2007, two employees exercised their stock options and purchased 18,812 shares for a total of $254,121.  


As of December 31, 2007, there were 1,100,188 shares available for grant under the 2003 Plan.


NOTE 7 – 401(k) PLAN


All full-time employees who are over 21 years old and have completed one year of service (as defined) are eligible for the Company’s 401(k) Plan (Plan).  Under this Plan, an employee may elect to defer his/her compensation (up to a maximum of $15,500, annually adjusted) and have it contributed to the Plan.  Employer contributions to the Plan are at the discretion of the Company.  During 2007, 2006 and 2005, the Company made matching contributions to the Plan of up to 50% of the first 6% of employee salary.  The total expense relating to the Plan, including matching contributions, amounted to $135,849, $54,000 and $54,215 in 2007, 2006 and 2005, respectively.


NOTE 8 – RELATED PARTY TRANSACTIONS AND OTHER MATTERS


On July 31, 2007, Monmouth Real Estate Investment Corporation (MREIC) and Monmouth Capital Corporation (MCC), both related entities to the Company, completed a strategic combination whereby a wholly-owned subsidiary of MREIC merged with and into MCC, and MCC survived as a wholly-owned subsidiary of MREIC.  Each outstanding share of MCC’s common stock was converted into and exchanged for 0.655 shares of MREIC’s common stock.  At the time of the merger, the Company had 107,403 shares of MCC common stock which was converted and exchanged for 70,349 shares of MREIC’s common stock.  Additionally, the Company’s $1,000,000 investment in MCC’s outstanding 8% Convertible Subordinated Debentures due 2013 is now convertible into MREIC common stock at an adjusted conversion price of $9.16 per share.  The Company’s $5,000,000 investment in MCC’s outstanding 8% Convertible Subordinated Debentures due 2015 is now convertible into MREIC common stock at an adjusted conversion price of $11.45 per share.  


Prior to the merger of MREIC and MCC, the Company operated as part of a group of three public companies (all REITs) which includes the Company, MREIC and MCC, (collectively the affiliated companies).   Some general and administrative expenses were allocated among the affiliated companies based on use or services



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provided.  Allocations of salaries and benefits are made based on the amount of the employees’ time dedicated to each affiliated company.  Subsequent to the merger, shared expenses are allocated between the Company and MREIC.    


There are five Directors of the Company who are also Directors and shareholders of MREIC.  The Company holds common stock and convertible debentures of MREIC in its securities portfolio (See Note 4 for current holdings).


Transactions with Monmouth Real Estate Investment Corporation


The Company has purchased shares of MREIC common stock primarily through MREIC’s Dividend Reinvestment and Stock Purchase Plan (See Note 4).  During 2004, the Company sold in the open market 745,250 shares of MREIC and recorded a gain on sale of $1,499,332.  On September 13, 2007, the Company purchased 1,000,000 shares of MREIC common stock from Palisade Concentrated Equity Partnership, L.P.(Palisade), an unrelated entity.  The total consideration for the purchase was $8,500,000.  On November 23, 2007, the Company purchased an additional 325,704 shares of MREIC common stock from Palisade for a total consideration of $2,768,484.  In addition to the convertible debentures, the Company now owns a total of 1,487,105 shares of MREIC common stock, representing 6.2% of the total shares outstanding at December 31, 2007.  


Transactions with Monmouth Capital Corporation


During 2005, the Company invested $5,000,000 in the convertible debenture private placement offering of MCC (the MCC 2005 Debenture).  The MCC 2005 Debenture pays interest at 8% and is now convertible into 436,681 shares of common stock of MREIC at any time prior to redemption or maturity.  The MCC 2005 convertible debenture matures on March 30, 2015.


During 2007, 2006 and 2005, the Company purchased from MCC at its cost, 2, 1 and 4 homes, respectively totaling $29,932, $20,361 and $79,305, respectively to be used as rental homes.


During 2005, the Company financed/refinanced certain loans on sales made by MCC to third parties.  These loans are secured by manufactured homes.  The total amount financed amounted to $10,500.


Salary, Directors’, Management And Legal Fees


The Company has an Employment Agreement with Mr. Eugene W. Landy, Chairman of the Board.  Under this agreement, Mr. Landy received an annual base compensation of $150,000 (as amended) plus bonuses and customary fringe benefits, including health insurance, participation in the Company’s 401(k) Plan, stock options, five weeks’ vacation and use of an automobile.  Additionally, there may be bonuses voted by the Board of Directors.  The Employment Agreement is terminable by either party at any time subject to certain notice requirements.  On severance of employment by the Company, Mr. Landy will receive severance of $450,000, payable $150,000 on severance and $150,000 on the first and second anniversaries of severance.  In the event of disability, Mr. Landy’s compensation will continue for a period of three years, payable monthly.  On retirement, Mr. Landy will receive a pension of $50,000 a year for ten years, payable in monthly installments.  In the event of death, Mr. Landy’s designated beneficiary will receive $450,000, $100,000 thirty days after death and the balance one year after death.  The Employment Agreement automatically renews each year for successive one-year periods.  Effective January 1, 2004, this agreement was amended to increase Mr. Landy's annual base compensation to $175,000.  Additionally, Mr. Landy's pension benefit of $50,000 per year has been extended for an additional three years.  


Effective January 1, 2005, the Company and Samuel A. Landy entered into a three-year Employment Agreement under which Mr. Samuel Landy receives an annual base salary of $329,922 for 2005, $346,418 for 2006 and $363,739 for 2007 plus bonuses and customary fringe benefits.  Bonuses are at the discretion of the Board of Directors and are based on certain guidelines.  Mr. Samuel Landy will also receive four weeks vacation, use of an automobile, and stock options for 50,000 shares in each year of the contract.  On severance by the Company, Mr. Samuel Landy is entitled to one year’s salary.  In the event of disability, Mr. Samuel Landy will receive lost wages from a disability insurance policy.  In the event a merger of the Company, sale or change of control, Mr. Landy shall have the right to extend and renew this Employment Agreement so that the expiration date will be three years from the date of merger, sale or change of control.  During 2005, the Company had loans outstanding from Mr. Samuel A.



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Landy.  These loans were repaid during 2005.  The interest rate on these loans ranged from 6.36% to 7.86%.  Interest earned on these loans during 2005 amounted to $12,108.


Effective January 1, 2006, the Company and Anna T. Chew entered into a three-year Employment Agreement.  Ms. Chew will receive an annual base salary of $225,133 for 2006, plus bonuses and customary fringe benefits.  Each year Ms. Chew will receive a 5% increase in her base salary.  Ms. Chew will also receive four weeks vacation, use of an automobile, and stock options for 10,000 shares in each year of the contract.  On severance by the Company, Ms. Chew is entitled to an additional one year’s salary.  In the event of disability, Ms. Chew will receive lost wages from a disability insurance policy.  In the event of a merger of the Corporation, sale or change of control, Ms. Chew shall have the right to extend and renew this Employment Agreement so that the expiration date will be three years from the date of merger, sale or change of control.


Other Matters


The Company has employment agreements with certain executive officers, which in addition to base compensation, bonuses and fringe benefits, provides for specified retirement benefits.  The Company has accrued these benefits on a present value basis over the terms of the agreements.   Amounts accrued under these agreements were $597,058 and $647,058 at December 31, 2007 and 2006, respectively.


In August, 1999, the Company entered into a lease for its corporate offices.  The lease is for a five-year term at market rates with monthly lease payments of $12,000, plus its proportionate share of real estate taxes and common area maintenance. The lessor of the property is owned by certain officers and directors of the Company.  The lease payments and the resultant lease term commenced on May 1, 2000.  Approximately 50% of the monthly lease payment of $12,000, plus its proportionate share of real estate taxes and common area maintenance is reimbursed by other related entities utilizing the leased space (MREIC and MCC).  On May 1, 2005, the Company renewed this lease for an additional five-year term.  The monthly lease payment was increased to $15,000, plus its proportionate share of real estate taxes and common area maintenance.


NOTE 9 – DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN


The Company has a Dividend Reinvestment and Stock Purchase Plan (DRIP).  Under the terms of the DRIP, shareholders who participate may reinvest all or part of their dividends in additional shares of the Company at approximately 95% of the market price.  Shareholders may also purchase additional shares at approximately 95% of their market price by making optional cash payments.  Generally, dividend reinvestments and purchases of shares are made quarterly on March 15, June 15, September 15 and December 15.


Effective June 24, 1998, the Company amended the Dividend Reinvestment and Stock Purchase Plan.  Shareholders were no longer able to purchase additional shares by making optional cash payments.  The dividend reinvestment feature of the Plan remained unchanged.


On March 19, 2003, the Company amended the Dividend Reinvestment and Stock Purchase Plan to provide for monthly optional cash payments of not less than $500 per payment nor more than $1,000 unless a request for waiver has been accepted by the Company.


Amounts received, including dividends reinvested of $1,840,527, $1,783,177 and $1,931,172 respectively, and shares issued in connection with the DRIP for the years ended December 31, 2007, 2006 and 2005 were as follows:


 

2007

2006

2005

Amounts Received/Dividends

   

   Reinvested

$5,306,062

$6,912,430

$9,188,271

Number of Share Issued

399,454

474,001

620,516




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NOTE 10 – DISTRIBUTIONS


The following cash distributions, including dividends reinvested, were paid to shareholders during the three years ended December 31, 2007, 2006 and 2005:


 

2007

2006

2005

Quarter Ended

Amount

 

Per Share

 

Amount

 

Per Share

 

Amount

 

Per Share

            

March 31

      $2,592,423

 

$.25

 

    $2,429,773

 

$.245

 

    $2,247,637

 

$.2425

June 30

      2,626,332

 

.25

 

2,470,173

 

.245

 

      2,307,619

 

.2450

September 30

      2,653,584

 

.25

 

      2,491,306

 

.245

 

      2,347,579

 

.2450

December 31

      2,671,263

 

.25

 

2,566,579

 

.250

 

      2,384,314

 

.2450

 

    

          
 

     $10,543,602

 

$1.00

 

$9,957,831

 

$.985

 

$9,287,149

 

$.9775


These amounts do not include the discount on shares purchased through the Company’s Dividend Reinvestment and Stock Purchase Plan.


On January 16, 2008, the Company declared a cash dividend of $.25 per share to be paid on March 17, 2008 to shareholders of record February 15, 2008.


NOTE 11 – FEDERAL INCOME TAXES


The Company elected to be taxed as a real estate investment trust (REIT) in accordance with the Internal Revenue Code, commencing with its taxable year ended December 31, 1992.  In order to qualify as a REIT, the Company must meet a number of organizational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its stockholders.  It is management’s current intention to adhere to these requirements and maintain the Company’s REIT status.  As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income it distributes currently to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years.  Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.  In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state, and local income taxes.


Federal Excise Tax


The Company does not have a Federal excise tax liability for the 2007, 2006 and 2005, since it intends to or has distributed all of its annual income.




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Reconciliation Between GAAP Net Income and Taxable Income


The following table reconciles GAAP net income to taxable income for the years ended December 31, 2007, 2006, and 2005:


  

2007

Estimate

(unaudited)

 


2006

Actual

 


2005

Actual

       

GAAP net income

$

        2,632,741

$

5,840,277

$

6,990,342     

Add (less) GAAP net loss (gain) of taxable REIT subsidiaries included above

 

        1,382,748

 

693,520

 



261,087

GAAP net income from REIT operations

 

        4,015,489

 

        6,533,797

 

7,251,429

Book / tax difference on gains / losses from capital transactions

 

           280,129

 

         (177,365)

 


(296,069)

Stock option expense

 

           132,386

 

           130,285

 

     102,580

Non-qualified stock options exercised

 

           (27,025)

 

           (40,227)

 

   (583,614)

Other book / tax differences, net

 

               1,766

 

           (85,774)

 

400,345

Taxable income before adjustments

 

        4,402,745

 

        6,360,716

 

  6,874,671

Less capital gains

 

     -0-   

 

      (1,108,389)

 

(1,415,329)

Adjusted taxable income subject to 90% dividend requirement


$

               4,402,745


$

        5,252,327


$


5,459,342

       


Reconciliation Between Cash Dividends Paid and Dividends Paid Deduction


The following table reconciles cash dividends paid with the dividends paid deduction for the years ended December 31, 2007, 2006, and 2005:


  

2007

 

2006

 

2005

       

Cash dividends paid

$

10,543,602

$

9,957,831

$

9,287,149

Less: Dividends designated to prior year

 

-0-

 

-0-

 

-0-

Less: Portion designated capital gains

distribution

 

-0-

 

(1,108,389)

 


(1,415,329)

Less: Return of capital

 

5,374,204

 

(1,930,611)

 

(1,250,278)


Dividends paid deduction


$

5,169,398


$

6,918,831


$


6,621,542

       


Characterization of Distributions


The following table characterizes the distributions paid per common share for the years ended December 31, 2007, 2006, and 2005:


   

   2007

   

   2006

   

  2005

 
  

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

             

Ordinary income

$

.49029

 

49.0288%

$

   0.68433

 

69.4749%

$

   0.69605

 

71.2077%

Return of capital

 

.50971

 

50.9712%

 

   0.19099

 

19.3900%

 

   0.13143

 

13.4454%

Capital gains

 

-0-

 

-0-%

 

   0.10968

 

11.1351%

 

   0.15002

 

15.3469%

 


$


     1.0000

 


100.000%


$

  

   0.98500

 


100.000%


$

  

   0.97750

 


100.000%

             




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In addition to the above, taxable income from non-REIT activities conducted by S&F, a taxable REIT subsidiary, is subject to federal, state and local income taxes.  Deferred income taxes pertaining to S&F are accounted for using the asset and liability method.  Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled.  However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors.  For the years ended December 31, 2007, 2006 and 2005, S&F had operating losses for financial reporting purposes of $1,382,748, $693,520 and  $261,087, respectively.  Therefore, a valuation allowance has been established against any deferred tax assets relating to S&F.  For the years ended December 31, 2007, 2006 and 2005, S&F recorded $201,000, $27,000 and $88,000, respectively, in federal, state and franchise taxes which have been included in general and administrative expenses.


NOTE 12 – COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS


The Company is subject to claims and litigation in the ordinary course of business.  Management does not believe that any such claim or litigation will have a material adverse effect on the business, assets, or results of operations of the Company.


NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS


The Company is required to disclose certain information about fair values of financial instruments, as defined in SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”.


Limitations


Estimates of fair value are made at a specific point in time, based upon, where available, relevant market prices and information about the financial instrument.  Such estimates do not include any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Almost all of the Company’s securities available for sale have quoted market prices.  However, for a portion of the Company's other financial instruments, no quoted market value exists.  Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management).  Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience and other factors.  Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model.  Use of different assumptions or methodologies is likely to result in significantly different fair value estimates.


The fair value of cash and cash equivalents and notes receivables approximates their current carrying amounts since all such items are short-term in nature.  The fair value of securities available for sale is primarily based upon quoted market values. The fair value of variable rate mortgages payable and loans payable approximate their current carrying amounts since such amounts payable are at approximately a weighted-average current market rate of interest.    For 2007, the fair and carrying values of fixed rate mortgages payable amounted to $41,428,086 and $40,826,809 respectively.  For 2006, the fair and carrying value of fixed rate mortgages payable amounted to $20,000,738 and $19,869,713, respectively.  The fair value of mortgages payable is based upon discounted cash flows at current market rates for instruments with similar remaining terms.


NOTE 14 – SUPPLEMENTAL CASH FLOW AND COMPREHENSIVE INCOME INFORMATION


Cash paid during the years ended December 31, 2007, 2006 and 2005 for interest was $3,965,090, $3,704,853, and $2,793,166, respectively.


During the years ended December 31, 2007, 2006 and 2005, land development costs of $6,056,385, $3,094,939 and $5,596,310, respectively were transferred to investment property and equipment and placed in service.




-67-





During the years ended December 31, 2007, 2006 and 2005, the Company had dividend reinvestments of $1,840,527, $1,783,177 and $1,931,172, respectively which required no cash transfers.


The following are the reclassification adjustments related to securities available for sale included in Other Comprehensive Income:


 

2007

 

2006

 

2005

Unrealized holding loss arising

  during the year


($2,161,643)

 


 ($399,217)

 


($1,038,718)

Less: reclassification adjustment

  for net gains realized in income


734,649

 


(132,462)

 


(1,187,658)

      

Net unrealized holding loss

($1,426,994)

 

($531,679)

 

($2,226,376)


NOTE 15 – SUBSEQUENT EVENTS


On February 27, 2008, the Company increased and refinanced its mortgage loans on D&R Village and Waterfalls Village with Bank of America.  The new principal balance is $8,700,000.  This mortgage payable is due on February 27, 2013 with interest at a fixed rate of 5.614%.  Proceeds were primarily used to pay off the existing mortgages on D&R Village and Waterfalls Village and to pay down our margin loans.


NOTE 16 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)


SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

THREE MONTHS ENDED


2007

March 31

 

June 30

 

September 30

 

December 31

        

Total Revenues

$8,800,346

 

$11,351,020

 

$9,971,274

 

$8,718,061

Total Expenses

7,995,017

 

9,457,305

 

9,884,271

 

         8,970,685

Net Income  (1)

837,241

 

1,928,327

 

110,239

 

           (243,066)

Net Income per Share –

  Basic


.08

 


.18

 


.01

 


(.02)

  Diluted

.08

 

.18

 

.01

 

(.02)

        

2006

March 31

 

June 30

 

September 30

 

December 31

        

Total Revenues

$9,512,201

 

$10,343,852

 

$9,894,006

 

$12,894,551

Total Expenses

7,388,513

 

9,168,697

 

9,658,698

 

10,746,828

Net Income  (1)

2,140,525

 

1,217,949

 

276,075

 

2,205,728

Net Income per Share –

  Basic


.22

 


.12

 


.03

 


.22

  Diluted

.22

 

.12

 

.03

 

.22

        

(1)

Fluctuations are primarily due to changes in the fair value of interest rate swaps and Gain on Securities Transactions, net.




-68-





UMH PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2007

 

Column A

 

 Column B

  

 Column C

 

 Column D

     

 Initial Cost

  

 Description

 

 Encumbrances

  

 Land

 


Site, Land & Building Improvements and Rental Homes

 

Capitalization

Subsequent to Acquisition

          

 Memphis, TN

$

        5,112,246

 

$

      250,000

$

            2,569,101

$

        1,936,380

 Greenfield Ctr, NY

 

   -0-

  

        37,500

 

               232,547

 

        2,563,639

 Vineland, NJ

  

(1)

 

      320,000

 

            1,866,323

 

        1,037,173

 Duncansville, PA

 

   -0-

  

        60,774

 

               378,093

 

           811,321

 Cranberry Twp, PA

 

         1,839,464

  

      181,930

 

            1,922,931

 

           525,595

 Clifton Park, NY

 

         2,388,419

  

      391,724

 

               704,021

 

        1,476,967

 Apollo, PA

 

   -0-

  

      670,000

 

            1,336,600

 

        1,246,774

 Cranberry Twp, PA

 

         2,943,142

  

        75,000

 

               977,225

 

        1,456,883

 Millville, NJ

 

       11,353,202

   

 

      216,000

 

            1,166,517

 

        7,938,015

 Kutztown, PA

 

       10,402,086

  

      145,000

 

            1,695,041

 

        7,370,110

 Inkerman, PA

 

         2,806,252

  

      572,500

 

            2,151,569

 

        3,461,326

 Monticello, NY

 

   -0-

  

      235,600

 

            1,402,572

 

        3,656,655

 Navarre, OH

 

   -0-

  

      290,000

 

            1,457,673

 

        1,953,727

 Cresson, PA

 

   -0-

  

      432,700

 

            2,070,426

 

        1,308,247

 Memphis, TN

 

   -0-

  

        78,435

 

               810,477

 

        1,212,913

 West Grove, PA

 

   

(1)

 

      175,000

 

               990,515

 

        1,013,562

 Carlisle, PA

 

   -0-

  

        37,540

 

               198,321

 

        4,181,017

 Belle Vernon, PA

 

         5,053,403

  

      150,000

 

            2,491,796

 

        4,695,014

 Marion, OH

 

   -0-

  

      236,000

 

               785,293

 

        3,395,349

 Somerset, PA

 

         1,642,302

  

   1,485,000

 

            2,050,400

 

        3,902,125

 Athens, OH

 

   -0-

  

        67,000

 

            1,326,800

 

           575,474

 Magnolia, OH

 

         2,825,496

  

      270,000

 

            1,941,430

 

        2,770,838

 Jackson, NJ

 

   

(1)

 

      100,095

 

               602,820

 

        1,495,389

 Hamburg, NY

 

         2,049,655

  

      424,000

 

            3,812,000

 

           957,241

 West Monroe, NY

 

   -0-

  

        77,000

 

               841,000

 

           589,812

 Lebanon, TN

 

   -0-

  

   1,184,000

 

            4,034,480

 

           383,969

 Eatontown, NJ

 

   

(1)

 

      157,421

 

               280,749

 

           461,498

 Caledonia, OH

 

   -0-

  

      260,000

 

            1,753,206

 

        1,815,869

 Coxsackie, NY

 

   -0-

  

   1,757,800

 

                       -0-   

 

                   -0-   

          
  

       48,415,667

   

$

 10,338,019

$

          41,849,926

$

      64,192,882

            Various

 

       13,334,033

(1)

      
 

$

       61,749,700

       
          

(1)  Represents one mortgage note payable secured by four properties.



-69-





UMH PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2007


Column A

 

 Column E (2) (3)

 

Column F (2)

  

      Gross Amount at Which Carried

at 12/31/07

  

Description

 

Land

 


Site, Land & Building Improvements and Rental Homes

 

Total

 

Accumulated Depreciation

         

 Memphis, TN

$

     250,000

$

        4,505,481

$

    4,755,481

$

         3,186,884

 Greenfield Ctr, NY

 

     122,865

 

        2,710,821

 

    2,833,686

 

         1,367,016

 Vineland, NJ

 

     408,206

 

        2,815,290

 

    3,223,496

 

         2,220,351

 Duncansville, PA

 

       60,774

 

        1,189,414

 

    1,250,188

 

            661,258

 Cranberry Twp, PA

 

     181,930

 

        2,448,526

 

    2,630,456

 

         2,058,533

 Clifton Park, NY

 

     391,724

 

        2,180,988

 

    2,572,712

 

         1,217,790

 Apollo, PA

 

     732,089

 

        2,521,285

 

    3,253,374

 

            989,287

 Cranberry Twp, PA

 

      75,000

 

        2,434,108

 

    2,509,108

 

         1,885,853

 Millville, NJ

 

  2,534,891

 

        6,785,641

 

    9,320,532

 

         2,649,333

 Kutztown, PA

 

     404,239

 

        8,805,912

 

    9,210,151

 

         2,787,895

 Inkerman, PA

 

     572,500

 

        5,612,895

 

    6,185,395

 

         2,403,357

 Monticello, NY

 

     318,472

 

        4,976,355

 

    5,294,827

 

         1,883,336

 Navarre, OH

 

     290,000

 

        3,411,400

 

    3,701,400

 

            569,080

 Cresson, PA

 

     432,700

 

        3,378,673

 

    3,811,373

 

         1,599,581

 Memphis, TN

 

       78,435

 

        2,023,390

 

    2,101,825

 

         1,311,783

 West Grove, PA

 

     155,000

 

        2,024,077

 

    2,179,077

 

         1,611,489

 Carlisle, PA

 

     145,473

 

        4,271,405

 

    4,416,878

 

         1,058,219

 Belle Vernon, PA

 

     150,000

 

        7,186,810

 

    7,336,810

 

         3,727,917

 Marion, OH

 

     236,000

 

        4,180,642

 

    4,416,642

 

         1,830,016

 Somerset, PA

 

  1,485,000

 

        5,952,525

 

    7,437,525

 

            406,839

 Athens, OH

 

       67,000

 

        1,902,274

 

    1,969,274

 

            631,717

 Magnolia, OH

 

     270,000

 

        4,712,268

 

    4,982,268

 

         2,790,401

 Jackson, NJ

 

     100,095

 

        2,098,209

 

    2,198,304

 

         1,600,060

 Hamburg, NY

 

     424,000

 

        4,769,241

 

    5,193,241

 

         1,522,979

 West Monroe, NY

 

       77,000

 

        1,430,812

 

    1,507,812

 

            224,723

 Lebanon, TN

 

  1,184,000

 

        4,418,449

 

    5,602,449

 

            276,987

 Eatontown, NJ

 

     135,421

 

           764,247

 

       899,668

 

            417,308

 Caledonia, OH

 

     260,000

 

        3,569,075

 

    3,829,075

 

         1,032,391

 Coxsackie, NY

 

  1,757,800

 

                    -0-   

 

    1,757,800

 

                    -0-   

         
 

$

13,300,614

$

    103,080,213

$

       116,380,827

$

       43,922,385


(2)

See reconciliation.

(3)

The aggregate cost for Federal tax purposes approximates historical cost.




-70-





UMH PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2007


Column A

Column G

 

Column H

 

Column I

      

Description

Date of Construction

 

Date Acquired

 

Life

      

 Memphis, TN

prior to 1980

 

1986

 

  3 to 27.5

 Greenfield Ctr, NY

prior to 1970

 

1977

 

  3 to 27.5

 Vineland, NJ

 1973

 

1986

 

  3 to 27.5

 Duncansville, PA

1961

 

1979

 

  3 to 27.5

 Cranberry Twp, PA

 1974

 

1986

 

  5 to 27.5

 Clifton Park, NY

 1972

 

1978

 

  3 to 27.5

 Apollo, PA

prior to 1980

 

1995

 

  5 to 27.5

 Cranberry Twp, PA

prior to 1980

 

1982

 

  3 to 27.5

 Millville, NJ

prior to 1980

 

1985

 

  3 to 27.5

 Kutztown, PA

 1971

 

1979

 

  5 to 27.5

 Inkerman, PA

 1970

 

1992

 

  5 to 27.5

 Monticello, NY

 1972

 

1988

 

  5 to 27.5

 Navarre, OH

prior to 1980

 

1987

 

  5 to 27.5

 Cresson, PA

prior to 1980

 

2001

 

  5 to 27.5

 Memphis, TN

 1955

 

1985

 

  3 to 27.5

 West Grove, PA

 1971

 

1974

 

  5 to 27.5

 Carlisle, PA

 1961

 

1969

 

  3 to 27.5

 Belle Vernon, PA

 1973

 

1983

 

  3 to 27.5

 Marion, OH

 1950

 

1986

 

  3 to 27.5

 Somerset, PA

prior to 1980

 

2004

 

  5 to 27.5

 Athens, OH

prior to 1980

 

1996

 

  5 to 27.5

 Magnolia, OH

prior to 1980

 

1985

 

  5 to 27.5

 Jackson, NJ

 1969

 

1969

 

  3 to 27.5

 Hamburg, NY

prior to 1980

 

1997

 

  5 to 27.5

 West Monroe, NY

prior to 1980

 

2003

 

  5 to 27.5

 Lebanon, TN

1997

 

2006

 

  5 to 27.5

 Eatontown, NJ

 1964

 

1978

 

  3 to 27.5

 Caledonia, OH

prior to 1980

 

1996

 

  5 to 27.5

 Coxsackie, NY

N/A

 

2005

 

 N/A




-71-





UMH PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2007


  

/----------FIXED ASSETS-----------/

(2)

Reconciliation:

12/31/07

 

12/31/06

 

12/31/05

       
 

Balance – Beginning of Year

$105,139,224

 

$96,241,037

 

$84,825,549

       
 

Additions:

     
 

Acquisitions

-0-

 

                5,218,480

 

3,661,555

 

Improvements

12,731,558

 

                5,012,850

 

8,317,782

 

Depreciation

-0-

 

-0-

 

-0-

       
 

  Total Additions

12,731,558

 

              10,231,330

 

11,979,337

       
 

Deletions

1,489,955

 

                1,333,143

 

563,849

       
 

Balance – End of Year

$116,380,827

 

            $105,139,224

 

$96,241,037

       



  

/-----ACCUMULATED DEPRECIATION-----/

 

Reconciliation:

12/31/07

 

12/31/06

 

12/31/05

       
 

Balance – Beginning of Year

$41,540,038

 

    $39,296,286

 

$36,852,889

       
 

Additions:

     
 

Acquisitions

-0-

 

-0-

 

-0-

 

Improvements

-0-

 

-0-

 

-0-

 

Depreciation

2,936,037

 

      2,649,013

 

2,662,104

       
 

  Total Additions

2,936,037

 

      2,649,013

 

2,662,104

       
 

Deletions

553,690

 

        405,261

 

218,707

       
 

Balance – End of Year

$43,922,385

 

    $41,540,038

 

$39,296,286

       




-72-





SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


UMH PROPERTIES, INC.



BY:  /s/Eugene W. Landy

EUGENE W. LANDY

Chairman of the Board

Dated:        March 10, 2008


Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Title

Date


  

/s/Eugene W. Landy

EUGENE W. LANDY

Chairman of the Board

March 10, 2008


  

/s/Samuel A. Landy

SAMUEL A. LANDY

President,

Chief Executive Officer  and Director

March 10, 2008


  

/s/Anna T. Chew

ANNA T. CHEW

Vice President,

Chief Financial Officer, Treasurer and Director

March 10, 2008


  

/s/James Mitchell

JAMES MITCHELL

Director

March 10, 2008


  

/s/Richard H. Molke

RICHARD H. MOLKE

Director

March 10, 2008


  

/s/Eugene Rothenberg

EUGENE ROTHENBERG

Director

March 10, 2008


  

/s/Stephen B. Wolgin

STEPHEN B. WOLGIN

Director

March 10, 2008




-73-