Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - UNITED MORTGAGE TRUST | Financial_Report.xls |
| EX-31 - EXHIBIT 31 - UNITED MORTGAGE TRUST | v404852_ex31.htm |
| EX-32 - EXHIBIT 32 - UNITED MORTGAGE TRUST | v404852_ex32.htm |
| EX-3.3 - EXHIBIT 3.3 - UNITED MORTGAGE TRUST | v404852_ex3-3.htm |
| EX-23.1 - EXHIBIT 23.1 - UNITED MORTGAGE TRUST | v404852_ex23-1.htm |
| EX-23.3 - EXHIBIT 23.3 - UNITED MORTGAGE TRUST | v404852_ex23-3.htm |
| EX-99.1 - EXHIBIT 99.1 - UNITED MORTGAGE TRUST | v404852_ex99-1.htm |
| EX-23.2 - EXHIBIT 23.2 - UNITED MORTGAGE TRUST | v404852_ex23-2.htm |
| EX-99.2 - EXHIBIT 99.2 - UNITED MORTGAGE TRUST | v404852_ex99-2.htm |
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, 2014.
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _______________ to _______________.
Commission File Number 000-32409
UNITED MORTGAGE TRUST
(Exact name of registrant as specified in its charter)
| MARYLAND | 75-6493585 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
1301 Municipal Way, Grapevine TX 76051
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number: (214) 237-9305
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial interest, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
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 ¨ No x
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.
Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of the 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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed with reference to the price at which the common equity as last sold, or the average of the bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter.
There is currently no established public market on which the Registrant’s common shares are traded. The aggregate market value of the Registrant’s shares of beneficial interest held by non-related parties of the Registrant at June 30, 2014 computed by reference to the price at which the common equity was last sold was $93,432,739
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
As of March 31, 2015 6,429,438 of the Registrant's Shares of beneficial interest were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference to the Registrant’s definitive proxy statement for the 2014 annual meeting of shareholders.
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This annual report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not statements of fact and can be identified by words such as “anticipate,” “expect,” “estimate,” “intend,” “seek,” “plan,” “will,” “should,” “may” and similar terms, including their negative forms, and also by references to strategies, plans or intentions. Such statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the availability of and our ability to find suitable mortgage investments; economic trends affecting the real estate industry generally and the current conditions in the housing and mortgage industries including the impact thereof on the homebuilding industry, current high unemployment rates and changes in economic and credit market conditions, federal and state legislative action and actions of regulatory agencies, changes in interest rates, our ability to adapt to changing circumstances, the concentration of our credit risks particularly with related parties, the continued financial viability of related parties to whom we have extended loans, the ability of counterparties to perform their obligations to us, and the requirement to maintain qualification as a real estate investment trust. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore we cannot give assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or by any other person that the results or conditions described in such statements or in our objectives and plans will be realized. Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in Item 1A of this Annual Report and in our other filings with the Securities and Exchange Commission (“SEC”). Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.
GENERAL
United Mortgage Trust (which we refer to in this report as “we,”, “us”, “our”, “UMT”, the “Trust” and the “Company”) is a Maryland real estate investment trust formed on July 12, 1996. We acquire mortgage investments from several sources, including from related parties of our Advisor, UMTH General Services, L.P., a Delaware limited partnership (“Advisor” or “UMTHGS”). The amount of mortgage investments acquired from such sources depends upon the mortgage investments that are available from them or from other sources at the time we have funds to invest. We believe that all mortgage investments purchased from related parties of the Advisor are at prices consistent with those that would be paid to non-related third parties for mortgages with comparable terms, rates, credit risks and seasoning. For a more detailed description of these and other related parties and our transactions with them, please see Part III, Item 13 “Certain Relationships and Related Transactions and Director Independence” in this Annual Report.
In the past, we have invested in first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans” and first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages, some of which are still outstanding. Currently, our principal investment objectives are to invest proceeds from our financing proceeds, proceeds from the repayment of our loans, capital transaction proceeds and retained earnings in the following types of investments: (i) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (ii) lines of credit and loans secured by developed single-family lots, referred to as “Finished Lot Loans”; (iii) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (iv) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”;)”; (v) to provide credit enhancements to real estate developers, homebuilders, land bankers and other real estate investors who acquire real property, subdivide real property into single-family residential lots, acquire finished lots and/or build homes on such lots referred to as “Credit Enhancements”; (vi) discounted cash flows secured by assessments levied on real property; and (vii) senior or subordinate securities backed by finished lot loans and/or development loans referred to as “Securitizations”. We collectively refer to the above listed loans as “Mortgage Investments”. Additionally, our portfolio includes obligations of related parties of our Advisor, which we refer to as “Recourse Obligations” and “Deficiency Notes.”
Land Development Loans are expected to have terms from 12 to 48 months. Our loans to United Development Funding, L.P., a Nevada Limited Partnership, (“UDF”), are secured by the pledge of all of UDF’s Land Development Loans and equity participations, and are subordinated to its senior debt. Finished Lot Loans, Construction Loans and builder Model Home Loans are expected to have terms of 9 to 48 months.
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We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate cash flow for monthly distribution to our shareholders. We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).
The overall management of our business is vested in our Board of Trustees (the “Board”). UMTHGS has been retained as Advisor to manage our day-to-day operations and to use its best efforts to seek out and present, whether through its own efforts or those of third parties retained by it, investment opportunities that are consistent with our investment policies and objectives and consistent with the investment programs the members of the Board (the “Trustees”) may adopt from time to time in conformity with our Second Amended and Restated Declaration of Trust (“Declaration of Trust”).
In addition to this Annual Report, we file quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). All documents that we file with the SEC are available free of charge on our website, which is www.unitedmorgagetrust.com. You may also read and copy any document that we file at the public reference facilities of the SEC at 450 Fifth Street NW, Washington DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the internet (http://www.sec.gov).
Our principal executive offices are located at 1301 Municipal Way, Grapevine TX 76051, telephone (214) 237-9305 or (800) 955-7917, facsimile (214) 237-9304.
INVESTMENT OBJECTIVES AND POLICIES OF UNITED MORTGAGE TRUST
PRINCIPAL INVESTMENT OBJECTIVES
Our principal investment objectives are to invest proceeds from our financing proceeds, proceeds from the repayment of our loans, capital transaction proceeds and retained earnings in the following types of investments:
| (i) | lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans;” |
| (ii) | lines of credit and loans secured by developed single-family lots, referred to as “Finished Lot Loans;” |
| (iii) | lines of credit and loans secured by completed model homes, referred to as “Model Home Loans;” |
| (iv) | lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans;” |
| (v) | to provide credit enhancements to real estate developers, homebuilders, land bankers and other real estate investors who acquire real property, subdivide real property into single-family residential lots, acquire finished lots and/or build homes on such lots referred to as “Credit Enhancements;” |
| (vi) | discounted cash flows secured by assessments levied on real property; and |
| (vii) | senior or subordinate securities backed by finished lot loans and/or development loans referred to as “Securitizations.” |
We collectively refer the above listed loans as “Mortgage Investments”.
Mortgage Investments and Credit Enhancements are expected to:
| (1) | produce net interest income and fees; |
| (2) | provide monthly distributions from, among other things, interest on Mortgage Investments and fees from Credit Enhancements; and |
| (3) | permit reinvestment of payments of principal and proceeds of prepayments, sales and insurance net of expenses. |
There is no assurance that these objectives will be attained.
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INVESTMENT POLICY
Most of our Mortgage Investments to date are geographically concentrated in the Texas market. We anticipate that this concentration will continue in the near future, but it is our intention to expand our geographic presence through the purchase of Mortgage Investments in other geographic areas of the United States. In making the decision to invest in other areas, we consider the market conditions prevailing at the time we invest.
As of December 31, 2014, our portfolio was comprised of:
| Mortgage Loan Category: | Percentage of Mortgage Portfolio: | |||
| First lien secured interim mortgages 12 months or less and residential mortgages | 14 | % | ||
| Secured Line of Credit to UMTH Lending Company, L.P. (“UMTHLC”) | 6 | % | ||
| Land development loans | 67 | % | ||
| Finished lot loans | 7 | % | ||
| Construction loans | 6 | % | ||
We no longer invest in Interim Loans or Residential Mortgages. We plan to continue to invest in Land Development Loans, Finished Lot Loans, Construction Loans and Model Home Loans because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; and, 2) Model Home Loans and Construction Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home and Construction Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot. As we phased out of Interim Loans we increased the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans, Model Home Loans, and Construction Loans.
UNDERWRITING CRITERIA
We will not originate residential mortgage loans, except to facilitate the resale of a foreclosed property. Funds awaiting investment in Mortgage Investments will be invested in government securities, money market accounts or other assets that are permitted investments for REITs. See “Temporary Investments” below.
The underwriting criteria for Mortgage Investments are as follows:
| (1) | Priority of Lien |
| · | Land Development Loans and Finished Lot Loans must be secured by a first lien, second lien or a pledge of partnership interest that is insured by a title company. Second liens are subject to the Loan-to-Value (“LTV”) limitations set forth below. |
| · | Model Home Loans and Construction Loans will be secured by a first lien or a second lien that is insured by a title insurance company. Second liens are subject to the Loan-to-Value (“LTV”) limitations set forth below. |
| · | Credit Enhancements must be secured by first or second liens or pledges of partnership interests. |
| (2) | Rate and Fees |
| · | Our Advisor seeks to acquire Mortgage Investments that will provide us with a satisfactory net yield. Net yield is determined by the yield realized after payment of note servicing fees, if any, and administrative costs (ranging from 1% to 2% of our average invested assets). Rates will be either adjustable or fixed. No loans will be purchased at a premium above the outstanding principal balance. Our investment policy allows for acquisition of loans at various interest rates. Fees charged for Credit Enhancements will be determined by the degree of risk as determined and recommended by our Advisor. Credit Enhancement fees are expected to range between 0.5% and 3% per annum. |
| (3) | Term and Amortization |
| · | There is no minimum term for the loans we acquire. |
| · | Land Development Loans, Finished Lot Loans and Model Home Loans will generally have terms from 24 to 48 months. |
| · | Construction Loans will generally have terms of 12 to 18 months. |
| · | Generally, Land Development Loans, Finished Lot Loans, Model Home Loans and Construction Loans do not amortize. They are interest only loans with the principal paid in full when the loans mature. |
| · | Credit Enhancements will generally range from 12 to 48 months. |
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| (4) | Loan-to-Value (“LTV”), Investment-to-Value Ratio (“ITV”), Combined LTV Ratio (“CLTV”) |
| · | Land Development Loans, Finished Lot Loans and Construction Loans: Except as set forth below, loans purchased may not exceed an 85% ITV. Except as set forth below, Land Development Loans, Finished Lot Loans and Construction Loans will not exceed 85% of the value of the collateral securing the indebtedness (the LTV of the loan). The purchase of, or investment in, subordinate liens, secured loans or partnership interests securing loans will not exceed a CLTV of 85%, (subject to the exceptions listed below) and may not exceed 85% LTV for first liens and 100% CLTV for second lien loans. CLTV shall mean the sum of all indebtedness senior to us plus the sum of our investment or loan. |
| · | Model Home Loans: LTV may not exceed 93% of each first lien loan, and will be a part of a pool of model home collateral and will also be cross-collateralized. CLTV may not exceed 100% of second lien loans. All expenses associated with the model home are borne by the home builder. |
| (5) | Seasoning |
| · | None of the types of loans we currently purchase, or intend to purchase, are subject to seasoning requirements. |
| (6) | Borrower, Loan and Property Information |
| · | Land Development Loans, Finished Lot Loans, Model Homes Loans, Construction Loans, and Credit Enhancements: Borrower, loan and property information will be in accordance with guidelines set forth by the originating entities, UDF and UMTH Land Development, L. P. (“UMTHLD”), including economic feasibility studies, engineering due diligence reports, exit strategy analysis, and construction oversight requirements. Our Advisor, will periodically monitor compliance and changes to underwriting guidelines. |
| · | Our Advisor will employ the services of outside consultants, when and if necessary, to effectively evaluate each opportunity. |
| (7) | Appraisals |
| · | Land Development Loans, Finished Lot Loans, Construction Loans and Model Home Loans: Appraisal must demonstrate that the LTV, ITV or CLTV is in compliance with the above-referenced LTV, ITV and CLTV standards. Loans exceeding LTV, ITV and CLTV guidelines must note the criteria on which the exception was based. |
| · | The appraisals must be performed by appraisers approved by our Advisor. |
| (8) | Credit |
| · | Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Credit Enhancements: Extensions of credit to borrowers will be determined in accordance with net worth and down payment requirements prescribed by the originating companies (currently UDF and UMTHLD). Our Advisor shall periodically monitor compliance and changes to underwriting guidelines. |
| (9) | Hazard Insurance |
| · | Loans that are secured by a residence must have an effective, prepaid hazard insurance policy with a mortgagee's endorsement for our benefit in an amount not less than the outstanding principal balance on the loan. We reserve the right to review the credit rating of the insurance issuer and, if deemed unsatisfactory, request replacement of the policy by an acceptable issuer. |
| (10) | Geographical Boundaries |
| · | We may purchase Mortgage Investments and provide Credit Enhancements for real estate projects in any of the 48 contiguous United States. |
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| (11) | Mortgagees' Title Insurance |
| · | Each Mortgage Investment purchased must have a valid mortgagees' title insurance policy insuring our lien position in an amount not less than the outstanding principal balance of the loan. Such title policy shall be issued by a title company with an “S – Substantial” rating or higher, as rated by Demotech, Inc., an independent financial analysis firm, or other similar standard determined by our Board of Trustees. |
| (12) | Guarantees, Recourse Agreements, and Mortgage Insurance |
| · | Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Credit Enhancements shall have guarantees and collateral arrangements as determined by the originating companies (UDF and UMTHLD). Our Advisor shall review guarantees and recourse obligations. |
| (13) | Pricing |
| · | Mortgage Investments will be purchased at no minimum percentage of the principal balance, but in no event in excess of the outstanding principal balance. |
| · | Yields on our loan portfolio and fees charged for Credit Enhancements will vary with perceived risk, interest rate, credit, LTV ratios, down payments, guarantees or recourse agreements among other factors. Our objectives will be accomplished through the purchase of high rate loans, reinvestment of principal payments and other short-term investment of cash reserves and leverage of capital to purchase additional Mortgages Investments. |
The principal amounts of Mortgage Investments and the number of Mortgage Investments in which we invest will be affected by market availability and also depend upon the amount of capital available to us from proceeds of our retained earnings, repayment of our loans and borrowings. There is no way to predict the future composition of our portfolio since it will depend in part on the loans available at the time of investment.
TEMPORARY INVESTMENTS
We intend to use proceeds from our retained earnings, proceeds from the repayment of our loans and bank borrowings to acquire Mortgage Investments. There can be no assurance as to when we will be able to invest the full amount of capital available to us in Mortgage Investments, although we will use our best efforts to invest or commit for investment all capital within 60 days of receipt. We will temporarily invest any excess cash balances not immediately invested in Mortgage Investments or for the other purposes described above, in certain short-term investments appropriate for a trust account or investments which yield "qualified temporary investment income" within the meaning of Section 856(c)(6)(D) of the Internal Revenue Code of 1986, as amended (the “Code”), other investments which invest directly or indirectly in any of the foregoing (such as repurchase agreements collateralized by any of the foregoing types of securities), investments necessary for us to maintain our REIT qualification, short-term highly liquid investments such as in investments with banks having assets of at least $220,000,000, savings accounts, bank money market accounts, certificates of deposit, bankers' acceptances or commercial paper rated A-1 or better by Moody's Investors Service, Inc., securities issued, insured or guaranteed by the United States government or government agencies, or in money market funds having assets in excess of $220,000,000 which invest directly or indirectly in any of the foregoing.
OTHER POLICIES
We will not: (a) issue senior securities; (b) invest in the securities of other issuers for the purpose of exercising control; (c) invest in securities of other issuers, other than in temporary investments as described under " Temporary Investments;” (d) underwrite the securities of other issuers; or (e) offer securities in exchange for property.
We may borrow funds to make distributions to our shareholders or to acquire additional Mortgage Investments. Our ability to borrow funds is subject to certain limitations set forth in the Declaration of Trust, specifically, we may not incur indebtedness in excess of 50% of the Net Asset Value of the Trust
Other than in connection with the purchase of Mortgage Investments or issuance of Credit Enhancements, which may be deemed to be a loan from us to the borrower, we do not intend to loan funds to any person or entity. Our ability to lend funds to the Advisor, a Trustee or related parties thereof is subject to certain restrictions as described in "Summary of Declaration of Trust - Restrictions on Transactions with related parties.”
We will not sell property to our Advisor, a Trustee or Related Parties thereof at terms less favorable than could be obtained from a non-related party.
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Although we do not intend to invest in real property, to the extent we do, a majority of the Trustees shall determine the consideration paid for such real property, based on the fair market value of the property. If a majority of the Independent Trustees so determine, or if the real property is acquired from the Advisor, as Trustee or related parties thereof, a qualified independent real estate appraiser selected by the independent Trustees shall determine such fair market value.
We will use our best efforts to conduct our operations so as not to be required to register as an investment company under the Investment Company Act of 1940 and so as not to be deemed a "dealer" in mortgages for federal income tax purposes. See "Risks Related to Federal Income Taxation and Our Status as a REIT.”
We will not engage in any transaction which would result in the receipt by the Advisor or its related parties of any undisclosed "rebate" or "give-up" or in any reciprocal business arrangement which results in the circumvention of the restrictions contained in the Declaration of Trust and in applicable state securities laws and regulations upon dealings between us and the Advisor and its related parties.
The Advisor and its related parties, including companies, other partnerships and entities controlled or managed by such related parties, may engage in transactions described in our prospectus, including acting as Advisor, receiving distributions and compensation from us and others, the purchasing, warehousing, servicing and reselling of mortgage notes, property and investments and engaging in other businesses or ventures that may be in competition with us.
CHANGES IN INVESTMENT OBJECTIVES AND POLICIES
The investment restrictions contained in the Declaration of Trust may only be changed by amending the Declaration of Trust with the approval of our shareholders. However, subject to those investment restrictions, the methods for implementing our investment policies may vary as new investment techniques are developed. The Board of Trustees shall periodically, no less than annually review our investment policies and objectives and publish them in a public filing and direct mail communication to our shareholders.
COMPETITION
We believe that our principal competition in the business of acquiring and holding mortgage investments is from financial institutions such as banks, saving and loan associations, life insurance companies, institutional investors such as mutual funds and pension funds, and certain other mortgage REITs. While most of these entities have significantly greater resources than we do, we believe that we are able to compete effectively and to generate relatively attractive rates of return for shareholders due to our relationships with related party loan origination companies, our relatively low level of operating costs, our relationships with our sources of mortgage investments and the tax advantages of our REIT status.
EMPLOYEES
The Company has no direct employees. However, our Advisor is staffed with employees who possess expertise in all areas required to fulfill its obligation as manager of our day-to-day management. UMT Holdings, L.P. (“UMTH”) owns 99.9% of our Advisor. The services of our President and Chief Financial Officer, Mr. Ducote, are retained through a consulting agreement.
The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with the forward-looking statements contained in this Annual Report on Form 10-K because these risk factors could cause our actual results to differ materially from those expressed in any forward-looking statement. The risks highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected. We caution readers to keep these risk factors in mind and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report.
Risks Related to the Real Estate Industry
Our operations and results are subject to the risks associated with the real estate industry.
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Our operating results and the value of our mortgage investments, and consequently the value of your shares, are subject to the risk that if our mortgage investments do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to you will be adversely affected. The following factors, among others, may adversely affect our results:
| - | downturns in the national, regional and local economic climate; |
| - | competition from other real estate lenders; |
| - | local real estate market conditions, such as oversupply or reduction in demand for properties; |
| - | trends and developments in the homebuilding industry; |
| - | conditions in financial markets, including changes in interest rates, the availability and cost of financing, the fiscal and monetary policies of the United States government and the Board of Governors of the Federal Reserve System and international financial conditions; |
| - | unemployment rates; |
| - | increased operating costs, including, but not limited to, insurance expense, utilities, real estate taxes and state and local taxes; |
| - | civil disturbances, natural disasters, terrorist acts or acts of war which may result in uninsured or underinsured losses; and |
| - | declines in the financial condition of our borrowers and our ability to collect from our borrowers. |
Continued distressed conditions in the real estate and mortgage markets have had and may continue to have adverse effects on our results.
During 2014 the mortgage lending industry continued to experience some instability due to, among other things, defaults and foreclosures on sub-prime and prime loans and a resulting decline in the market value of such loans. These developments were initially referred to as the “sub-prime crisis” but it became evident in 2008 that the crisis had progressed beyond “sub-prime” mortgages as the default rate on prime mortgages also increased. The sub-prime crisis had become a credit crisis and part of an overall negative economic environment. In response to these negative market conditions, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led generally to less investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity and increased credit risk premiums.
The deterioration in the housing market has had an adverse impact on our portfolio of Mortgage Investments because our Interim Loan borrowers rely on prospective home buyers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, seasoning, employment history and liquidity requirements of conventional mortgage financing. These factors place the loans in the “non-conforming” category, meaning that they are not insured or guaranteed by a federally owned or guaranteed mortgage agency. Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing.
We believe that the impact of these factors on our operations has been significant. We have adopted active strategies to monitor and manage our credit risk and our portfolio of mortgage investments, such as eliminating our investments in new Interim Loans secured by conventionally built homes, with the objective of limiting the extent to which possible adverse financial effects from the credit crisis. However, we have two loans in California, which is one of the states that suffered most from the sub-prime crisis and conditions could change in Texas and in our other markets. Therefore, we can give no assurances that there will not be a marked increase in defaults under our Interim Loans accompanied by a rapid decline in real estate values that could have further material adverse effect upon our financial condition and operating results.
Real estate properties are illiquid and are difficult to sell in a poor market environment.
Real estate investments are relatively illiquid, which limits our ability to react quickly to adverse changes in economic or market conditions. Our ability to dispose of those of our assets which constitute real property depends on prevailing economic and market conditions. We may be unable to sell our properties to repay debt, to raise capital we need to fund our planned development and construction program, or to fund distributions to investors.
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Fluctuations in interest rates may affect our return on investment.
Mortgage interest rates may be subject to abrupt and substantial fluctuations. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. If prevailing interest rates rise above the average interest rate being earned by our mortgage investments, we may be unable to quickly liquidate our existing investments in order to take advantage of higher returns available from other investments. Furthermore, interest rate fluctuations may have a particularly adverse effect on the return we realize on our mortgage investments if we use money borrowed at variable rates to fund fixed rate mortgage investments. A portion of the loans we finance for UDF are junior in the right of repayment to senior lenders, who will provide loans representing 70% to 80% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.
Bankruptcy of borrowers may delay or prevent recovery on our loans.
The recovery of money owed to us may be delayed or impaired by the operation of the federal bankruptcy laws. Any borrower has the ability to delay a foreclosure sale for a period ranging from a few months to several months or more by filing a petition in bankruptcy, which automatically stays any actions to enforce the terms of the loan. The length of this delay and the associated costs would generally have an adverse impact on the return we realize on our investments.
Risks Related to Our Business
We may not be successful in managing credit risk, particularly as such risk is impacted by the economic conditions, which could adversely affect our results and our ability to pay distributions to our shareholders.
Despite our efforts to manage credit risk, there are many aspects of credit risk that we cannot control. In addition, the negative economic environment has created new circumstances that increase the difficulty of predicting the credit risks to which we will be exposed and limiting future delinquencies, defaults, and losses. Our borrowers may default and we may experience delinquencies at a higher rate than we anticipate. Our underwriting reviews may not be effective. Our loan loss reserves may prove to be inadequate. The value of the homes collateralizing our mortgage investments may decline. We may have difficulty selling any homes that are repossessed which could delay or prevent us from recovering our investment. Changes in lending trends, consumer behavior, bankruptcy laws, tax laws, regulations impacting the mortgage industry, and other laws may exacerbate loan losses. Other changes or actions by judges or legislators regarding mortgage loans and contracts including the voiding of certain portions of these agreements may reduce our earnings, impair our ability to mitigate losses, or increase the probability and severity of losses. Our loss mitigation efforts will impact our operating costs and may not be effective in reducing our future credit losses.
We have previously invested in non-conforming loans which are subject to a higher risk of default than conventional mortgage loans.
Most of our mortgage investments are “non-conforming” in that they are not insured by a federally owned or guaranteed mortgage agency. Also, a portion of our loans involve, directly or indirectly, borrowers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, employment histories and liquidity requirements of conventional mortgage financing. Accordingly, the risk of default by the borrowers of those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing. The three year average default rate for our residential mortgages and contracts for deed was approximately 0.54% and for our Interim Loans was approximately 0.0%.
We are exposed to concentrated credit risk with respect to a number of our loan transactions with related parties which could result in adverse results in the event of delinquencies or defaults.
A significant portion of our Mortgage Investments are comprised of loans we have made to related entities. Although we regularly conduct collectability analyses of these related entities, including UDF, the obligors under the recourse notes, UMTH and UMTHGS, because the security we hold for payment of a number of these obligations consists in significant part of receivables of these related parties from other related parties as well as from non-related parties and because our ultimate ability to collect on these obligations is dependent to a large extent upon the continued financial performance of those related parties we are exposed to a concentrated credit risk. In the event of a failure by those related parties to perform financially as they have regularly done in the past, our ability to collect on those obligations could be severely impaired or precluded. In such case, our earnings could be negatively impacted which in turn may limit distributions that we are able to pay to our shareholders.
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We have a dependence upon the UDF line of credit which exposes us to concentrated credit risk and could result in adverse results with respect to delinquencies or defaults.
The balance of our line of credit to UDF is approximately $82 million at December 31, 2014. A significant amount of our total earnings are provided through that lending arrangement: however we have sold a participation in the UDF loan to UDF III, L.P, effectively reducing our exposure to less than 10% of the outstanding loan balance at December 31, 2014. Effective December 31, 2010, the line of credit was increased from $60 million to $75 million and extended for one year, and effective December 31, 2012 the line of credit was increased from $75 million to $82 million. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015. The large amount that we have committed to the UDF line of credit means that we face a concentrated credit risk with UDF so that, in the event of delinquencies or defaults by UDF, a significant portion of our total portfolio of mortgage investments could be adversely affected. In addition, if we are unable to renew the line of credit when it expires or to find an alternative lending arrangement either with UDF or other borrowers that will allow us to use an equivalent amount of our lending resources and that will generate an equivalent or better return to us, our earnings will be negatively impacted which may result in an adverse impact on our ability to make distributions to our shareholders.
Our loans to UDF are junior to other lenders and expose us to the risks of the homebuilding industry that could result in losses on our mortgage investments.
Our loans to UDF are secured by UDF’s interest in mortgages and equity participations that it has obtained to secure its loans to real estate developers. Some of those mortgages are junior mortgages. The developers obtain the money to repay the development loans by reselling the residential home lots to home builders or individuals who build single-family residences on the lots. A developer’s ability to repay its loans is based primarily on the amount of money generated by the developer’s sale of its inventory of single-family residential lots. As a result, we are exposed to the risks of the homebuilding industry, which has undergone a significant downturn due in large part to the negative economic environment. Accordingly, continued or further deterioration of home building conditions or in the broader economic conditions of the homebuilding market could cause the number of homebuyers to decrease, which would increase the likelihood of defaults on the development loans and, consequently, increase the likelihood of a default on the UDF line of credit loan. If this were to occur, we may face the inability to recover the outstanding loan balance on foreclosure of collateral securing our loans because our rights to this collateral will be junior to the rights of senior lenders and because of the potentially reduced value of the underlying properties.
We may change our investment strategy, operating policies and/or asset allocations without shareholder consent which could result in losses.
We may change our investment strategy, operating policies and/or asset allocation with respect to investments, acquisitions, leverage, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our shareholders. A change in our investment strategy may increase our exposure to interest rate and/or credit risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from our historical investments. These changes could adversely affect our financial condition, results of operations, the Net Asset Value (“NAV”) of our shares or our ability to pay dividends or make distributions.
We purchase most of our mortgage investments from related parties of our Advisor, which may present a conflict of interest for our Advisor.
We acquire most of our mortgage investments from related parties of the Advisor. Due to the affiliation between the Advisor and those entities and the fact that those entities may earn fees on the origination of mortgage investments sold to us, the Advisor has a conflict of interest in determining if mortgage investments should be purchased from related or non-related third parties. These arrangements could affect our Advisor’s judgment and advice with respect to acquisitions of investments, originations of loans, sales of properties and other dealings between us and our Advisor.
We are dependent upon our Advisor for sourcing and management of our investments and management of our operations, and any adverse changes in the financial condition of our Advisor or its related parties or our relationship with them could hinder our operating performance and the return on our investments.
We rely heavily on our Advisor, and its related parties for the sourcing and management of our investments and for management of our operations. A significant portion of our investment activities are with related parties of our Advisor and therefore adverse changes in the financial condition of our Advisor or our relationship with our Advisor could hinder its ability to successfully manage our operations and our portfolio of investments and could limit our sources of investments. Because our Advisor and its related parties engage in other business activities, conflicts of interest may arise in operating more than one entity with respect to allocating time between those entities. This may cause our operations and our shareholders’ investment to suffer.
We have a high geographic concentration of mortgage investments in Texas and adverse changes in economic or market conditions in Texas could negatively affect our financial performance and condition.
A large percentage of the properties securing our mortgage investments are located in Texas, with approximately 38% in the Dallas/Fort Worth area. As a result, we have a greater susceptibility to the effects of an economic downturn in that area or from slowdowns in certain business segments that represent a significant part of that area’s overall economic activity such as energy, construction, financial services and tourism.
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We face the risk of loss on non-insured, non-guaranteed mortgage loans.
We generally do not obtain credit enhancements for our mortgage investments, because the majority of those mortgage loans are "non-conforming" in that they do not meet all of the underwriting criteria required for the sale of the mortgage loan to a federally owned or guaranteed mortgage agency. Accordingly, during the time we hold mortgage investments for which third party insurance is not obtained, we are subject to the general risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). In the event of a default on any mortgage investment held by us, including, without limitation, defaults resulting from declining property values and worsening economic conditions, we would bear the risk of loss of principal to the extent of any deficiency between the value of the related mortgage property and the amount owing on the mortgage loan. Defaulted mortgage loans would also cease to be eligible collateral for borrowings and would have to be held or financed by us out of other funds until those loans are ultimately liquidated, which could cause increased financing costs and reduced net income or a net loss.
We face risks under the representations, warranties and guarantees that we gave in connection with our securitization activities.
We have engaged in two securitizations of our mortgage investments as a means of providing funding. In these transactions, we receive the proceeds from third party investors for securities issued from our securitization vehicles which are collateralized by transferred mortgage investments from our portfolio. As part of those securitizations we made certain representations and warranties concerning the portfolio of mortgage investments conveyed and we also guaranteed certain obligations. If, because of irregularities in the underlying loans, our representations and warranties are inaccurate, we may be obligated to repurchase the loans from the purchasing entities at principal value, which may exceed market value.
Potential environmental liabilities could increase our costs and limit our ability to make distributions.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. In the event that we are forced to foreclose on a defaulted mortgage investment to recover our investment, we may be subject to environmental liabilities in connection with that real property which may cause its value to be diminished. Hazardous substances or wastes, contaminants, pollutants or sources thereof (as defined by state and federal laws and regulations) may be discovered on a property during our ownership or after a sale of that property to a third party. If those hazardous substances are discovered on a property, we may be required to remove those substances or sources and clean up the property. We could incur full recourse liability for the entire cost of any removal and clean up and the cost of such removal and clean up could exceed the value of the property or any amount that we could recover from any third party. We may also be liable to tenants and other users of neighboring properties for environmental liabilities. In addition, we may find it difficult or impossible to sell the property prior to or following any such clean up. The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or paying personal injury claims could reduce amounts available for distribution to our shareholders.
We obtain lines of credit and other borrowings, which increases our risk of loss due to potential foreclosure.
We finance our investment activities through the use of borrowed money from lines of credit and other borrowings. These borrowings may be secured by liens on our mortgage investments. Accordingly, we could lose our mortgage investments if we default on the indebtedness. Our debt service payments reduce our cash flow available for distributions. If we were unable to meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.
We employ leverage in connection with our investments, which increases the risk of loss in those investments.
We are allowed to borrow an aggregate amount not to exceed 50% of our net assets to acquire Mortgage Investments. In addition, we have engaged in securitizations in order to finance our loan purchases. Although the use of leverage can enhance returns and increase the number of investments that we can make, a further effect of leveraging is to increase the risk of loss. The higher the rate of interest on the financing, the more difficult it would be for us to meet our obligations and the greater the chance of default. We can offer no assurance that leveraged financing will be available to us on favorable terms or that, among other factors, the terms of such financing will parallel the maturities of the underlying assets acquired. If alternative financing is not available, we may have to liquidate assets at unfavorable prices to pay off such financing. The return on our investments and cash available for distribution to our shareholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire.
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We rely on appraisals that may not be accurate or may be affected by subsequent events.
Because our investment decisions are based in major part upon the value of the real estate underlying our mortgage investments and less upon the creditworthiness of the borrowers, we rely primarily on the real property securing the mortgage investments to protect our investment. We rely on appraisals and on Broker Price Opinions ("BPO's"), both of which are paid for and most of which are provided by the loan originator, to determine the fair market value of real property used to secure the mortgage investments we purchase. BPO’s are determinations of the value of a property based on a study of the comparable values of similar properties prepared by a licensed real estate broker. We cannot be sure that those appraisals or BPO's are accurate. Moreover, since an appraisal or BPO is given with respect to the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. Such subsequent events may include changes in general or local economic conditions, neighborhood values, interest rates and new construction. Moreover, subsequent changes in applicable governmental laws and regulations may have the effect of severely limiting the permitted uses of the property, thereby drastically reducing its value. Accordingly, if an appraisal is inaccurate or subsequent events adversely affect the value of the property, the mortgage investment would not be as secure as anticipated, and, in the event of foreclosure, we may not be able to recover our entire investment.
Our mortgages may be considered usurious in which case we may incur penalties and those loans may be unenforceable and result in losses to us.
Usury laws impose limits on the maximum interest that may be charged on loans and impose penalties for violations that may include restitution of the usurious interest received, damages for up to three times the amount of interest paid and rendering the loan unenforceable. Most, if not all, of the mortgage investments we purchase are subject to state usury laws and therefore we face the risk that the interest rate for our loans could be held usurious in states with restrictive usury laws.
We face risks in complying with Section 404 of the Sarbanes-Oxley Act of 2002.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we could be subject to regulatory action or other litigation, and our operating results could be harmed. Beginning with 2007, we were required to document and test our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires our management to assess annually the effectiveness of our internal control over financial reporting.
During the course of our testing, we may identify deficiencies that we may not be able to remediate in a timely manner. In addition, if we fail to maintain the adequacy of our internal accounting controls, as those standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Failure to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of which could have an adverse impact on our operations and our shares.
We face the risk of financial loss, litigation and regulatory action arising from the fraud, misconduct or inadvertent errors made by employees and contractors of our Advisor.
We are dependent upon our Advisor and the employees and contractors of our Advisor with respect to virtually all aspects of our operations and financial affairs. Fraud, misconduct or inadvertent errors by those employees or contractors could cause financial harm to us or expose us to litigation or regulatory action and injure our reputation. These types of conduct could include, among other types, activities such as unauthorized expenditures, defalcations, incorrect reporting of our transactions or errors or misstatements in required filings. Our ability to protect against and detect fraud, misconduct or inadvertent errors is limited and we may not be successful in detecting and remedying these actions in which case we may suffer financial and other harm that would have a negative impact on the value of our shares.
Risks Related to Federal Income Taxation and Our Status as a REIT
We face the risk of an inability to maintain our qualification as a REIT.
We are organized and conduct our operations in a manner that we believe enables us to be taxed as a REIT under the Code. To qualify as a REIT and avoid the imposition of federal income tax on any income we distribute to our shareholders, we must continually satisfy two income tests, two asset tests and one distribution test.
If, in any taxable year, we fail to distribute at least 90% of our taxable income, we will be taxed as a corporation and distributions to our shareholders will not be deductible in computing our taxable income for federal income tax purposes. Because of the possible receipt of income without corresponding cash receipts due to timing differences that may arise between the realization of taxable income and net cash flow (e.g., by reason of the original issue discount rules) or our payment of amounts that do not give rise to a current deduction (e.g., as principal payments on indebtedness), it is possible that we may not have sufficient cash or liquid assets at a particular time to distribute 90% of our taxable income. In that event, we could declare a consent dividend or we could be required to borrow funds or liquidate a portion of our investments in order to pay our expenses, make the required distributions to shareholders, or satisfy our tax liabilities, including the possible imposition of a four percent excise tax. We may not have access to funds to the extent, and at the time, required to make such payments.
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If we were taxed as a corporation, our payment of tax would substantially reduce the funds available for distribution to shareholders or for reinvestment and, to the extent that distributions had been made in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate certain of our investments in order to pay the applicable tax. Moreover, should our election to be taxed as a REIT terminate or be voluntarily revoked, we may not be able to elect to be treated as a REIT for the following four-year period.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our mortgage investments, the amounts we distribute to our shareholders and the ownership of our shares. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Complying with REIT requirements may force us to liquidate otherwise attractive investments or to make investments inconsistent with our business plan.
In order to qualify as a REIT, we must also determine that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer. No more than 25% of the total value of our assets can be stock in taxable REIT subsidiaries. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. The need to comply with these gross income and asset tests may cause us to acquire other assets that are qualifying real estate assets for purposes of the REIT requirements, but that are not part of our overall business strategy and might not otherwise be the best investment alternatives for us.
We may be subject to adverse legislative or regulatory tax changes.
Federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations are subject to amendment at any time. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
Risks Related to Ownership of Our Shares
Our dividend can fluctuate because it is based on earnings.
The dividend rate is fixed quarterly by our trustees, based, in part, on earnings projections. As such, the dividend rate may fluctuate up or down. Earnings are affected by various factors including use of leverage, cash on hand, current yield on investments, loan losses, general and administrative operating expenses and amount of non-income producing assets. We made distributions in excess of earnings between 1999 and 2005 and between 2008 and 2014. The amount of the excess constituted a return of capital.
We have not established a minimum dividend payment level for our shareholders and there are no assurances of our ability to pay dividends in the future.
We intend to pay monthly dividends and to pay dividends to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. Payment of such dividends, together with compliance with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended, or Internal Revenue Code. We have not established a minimum dividend payment level for our shareholders and our ability to pay dividends may be harmed by the risk factors described herein. We have reduced our level of dividend payments in recent years in reflection of the decline in interest rates and the yield on our investments. Future dividend payments to our shareholders will be made at the discretion of our Board of Trustees and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Trustees may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.
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Shareholders may have current tax liability on distributions they elect to reinvest in our common stock.
If our shareholders participate in our dividend reinvestment plan, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value, if any. As a result, unless our shareholders are tax-exempt entities, they may have to use funds from other sources to pay their tax liability on the value of the shares of common stock received. Effective April 15, 2015, pursuant to the terms of the DRP, the Board of Trustees will suspend the DRP until further notice. Please refer to our Report on Form 8-K filed on March 3, 2015 for further information about the modification to the DRP.
No active trading market for our shares currently exists and one may not develop in the future.
Our shares are not listed on any exchange nor to our knowledge are there any bona fide quotes for the shares on any inter-dealer quotation system or electronic communication network. We have no current plans to cause our shares to be listed on any exchange. As a result, an investor in our shares may be unable to sell those shares at a price equal to or greater than that which the investor paid, if at all.
Our shareholders may not be able to sell their shares under our share redemption program and, if our shareholders are able to sell their shares under the program, they will likely encounter a lengthy delay in receiving payment for their shares and may not be able to recover the amount of their investment in our shares.
Our Share Redemption Plan (“SRP”) contains numerous restrictions that limit our shareholders’ ability to sell their shares. Shareholders must hold their shares for at least one year in order to participate in the SRP, except for hardship redemptions (as defined in the plan). In addition, the SRP limits us to purchasing, in any consecutive 12 month period, more than 5% of the outstanding shares at the beginning of the 12 month period and repurchases are further subject to cash availability. Shares are repurchased at their NAV”. In recent years we have had a large number of requests from shareholders to purchase their shares and have been required to place shareholders in a queue and to make repurchases on a “first come, first served” basis in order for us to comply with the restrictions of our SRP. As a result, shareholders have experienced significant delays in receiving payment for their shares that they have submitted for purchase under the SRP. Since the repurchase price is equal to the NAV, a shareholder may receive less than the amount of their remaining investment in the shares. Moreover, our Trustees have the discretion to suspend or terminate the SRP upon 30 days’ notice. As a result of these restrictions and circumstances, the ability of our shareholders to sell their shares should they require liquidity, and to recover the value they invested, is significantly restricted. Currently our share redemptions are limited to death and medical hardship requests as approved by our trustees on a case-by-case basis.
Provisions of Maryland law and our governing documents may have an anti-takeover effect; investors may be prevented from receiving a “control premium” for their shares.
Provisions contained in our Declaration of Trust and bylaws, as well as Maryland corporate law may have anti-takeover effects that delay, defer or prevent a takeover attempt, which may prevent shareholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our shares or purchases of large blocks of our shares, thereby limiting the opportunities for our shareholders to receive a premium for their shares over then-prevailing market prices. These provisions include the following:
| · | Ownership limit. Our Declaration of Trust limits related investors who acquire over 9.8% of our shares (“Excess Shares”) from voting those shares, and we have the right to repurchase any Excess Shares held by any investor. |
| · | Maryland business combination statute. Maryland law restricts the ability of holders of more than 10% of the voting power of our shares to engage in a business combination with us. |
| · | Maryland control share acquisition statute. Maryland law limits the voting rights of large shareholders who acquire “control shares” in a “control share acquisition.” |
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
We do not maintain any physical properties.
We are unaware of any threatened or pending legal action or litigation that individually or in the aggregate could have a material effect on us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Plan (“SRP”).
REGISTRANT PURCHASES OF EQUITY SECURITIES
SHARE REDEMPTION PLAN
Our Trustees have the discretion to modify or terminate the SRP upon 30 days’ notice. Under the terms of our plan as last modified and effective on May 1, 2009 (see below for a further description of the plan modifications), shareholders who have held their shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 month period. The repurchase price is based on the net asset value (“NAV”) as of the end of the quarter prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2014 and 2013 the NAV was $14.81 and $14.66 per share, respectively. Under the prior SRP terms, the redemption price was $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long-term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long-term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that requests are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRP or the Company’s credit line. Currently our share redemptions are limited to death and medical hardship requests as approved by our trustees on a case-by-case basis. The Board received redemption requests for 32,039 shares and 19,708 shares were approved and redeemed during the year ended December 31, 2014. The Board received redemption requests for 72,297 shares and 17,847 shares were approved and redeemed during the year ended December 31, 2013.
Share repurchases have been at prices of $14.51 to $20.00 through our SRP. Shares repurchased for less than $20.00 per share were 1) shares held by shareholders for less than 12 months 2) shares purchased outside of our Share Redemption Program prior to the May 1, 2009 modifications to our SRP or 3) shares purchased under our SRP subsequent to the May 1, 2009 modifications to our SRP.
Prior to May 1, 2009 the redemption price was $20 based on the determination of our Board of Trustees regarding the value of the shares with reference to our book value, our operations to date and general market and economic conditions Subsequent to May 1, 2009, the redemption price was equal to the NAV as of the end of the quarter prior to the month in which the redemption was made.
The Company complies with Distinguishing Liabilities from Equity topic of FASB Accounting Standards Codification, which requires, among other things, that financial instruments that represent a mandatory obligation of the Company to repurchase shares be classified as liabilities and reported at settlement value. We believe that shares tendered for redemption by a shareholder under the SRP do not represent a mandatory obligation until such redemptions are approved at the discretion of our Board of Trustees. At such time, we will reclassify such obligations from equity to an accrued liability based upon their respective settlement values. At December 31, 2014 and 2013, all approved redemption requests had been paid.
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The following table summarizes the share repurchases made by us in 2014:
| Month | Total number of shares repurchased | Average Purchase Price | Total number of shares purchased as part of a publicly announced plan | Total number of shares purchased outside of plan | ||||||||||||
| January | 1,795 | $ | 14.76 | 1,795 | - | |||||||||||
| February | 2,188 | $ | 14.76 | 2,188 | - | |||||||||||
| March | 627 | $ | 14.76 | 627 | - | |||||||||||
| April | 1,603 | $ | 14.66 | 1,603 | - | |||||||||||
| May | 2,324 | $ | 14.66 | 2,324 | ||||||||||||
| June | 1,039 | $ | 14.53 | 1,039 | - | |||||||||||
| July | 1,828 | $ | 14.53 | 1,828 | - | |||||||||||
| August | 2,216 | $ | 14.54 | 2,216 | - | |||||||||||
| September | 1,134 | $ | 14.56 | 1,134 | - | |||||||||||
| October | 2,644 | $ | 14.56 | 2,644 | - | |||||||||||
| November | 1,759 | $ | 14.56 | 1,759 | - | |||||||||||
| December | 551 | $ | 14.51 | 551 | - | |||||||||||
| Totals | 19,708 | $ | 14.62 | 19,708 | - | |||||||||||
SHAREHOLDERS
On December 31, 2014, we had 6,431,960 shares of beneficial interest outstanding compared to 6,436,768 and 6,439,531 shares of beneficial interest outstanding at December 31, 2013 and 2012, respectively. The decrease in outstanding shares from 2012 to 2014 is due to the increase in repurchases under our SRP and the decrease of shares issued under our Dividend Reinvestment Plan (“DRP”). The shares were held by 2,502, 2,515, and 2,486 beneficial owners in 2014, 2013, and 2012, respectively. No single shareholder owned 5% or more of our outstanding shares at December 31, 2014, 2013 or 2012.
The redemption price is equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV is established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2014 and 2013 the NAV was $14.81 and $14.66 per share, respectively. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long-term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long-term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRP or the Company’s credit line. Currently our share redemptions are limited to death and medical hardship requests as approved by our trustees on a case-by-case basis.
Effective April 15, 2015, pursuant to the terms of the DRP, the Board of Trustees will suspend the DRP until further notice. Please refer to our Report on Form 8-K filed on March 3, 2015 for further information about the modification to the DRP.
DIVIDEND POLICY
Under our current dividend policy, our distribution is comprised of (i) all of our earnings and (ii) a return of capital. We may retain up to 10% of our earnings to build share value (“Retained Earnings”), and must distribute to shareholders at least 90% of our taxable income each year, which does not ordinarily equal net income as calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), so as to comply with the REIT provisions of the Code. To the extent we have available funds, we declare regular monthly dividends; however, if the Trustees were to determine that monthly dividends were not feasible, dividends would be declared quarterly). Any taxable income remaining after the distribution of the final regular monthly dividend each year, excluding our Retained Earnings, is distributed together with the first regular monthly dividend payment of the following taxable year or in a special dividend distributed prior thereto. The dividend policy is subject to revision at the discretion of the Board of Trustees. All distributions are made by us at the discretion of the Board of Trustees and depend on our taxable earnings, our Retained Earnings, our financial condition, maintenance of our REIT status and such other factors as the Board of Trustees deems relevant.
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Distributions to shareholders are generally subject to taxation as ordinary income, although a portion of those distributions may be designated by us as capital gain or may constitute a tax-free return of capital which reduces the tax basis for shares held by a shareholder at each monthly distribution date (provided the distribution does not exceed a shareholder’s tax basis in the shares). We declared dividends that resulted in a return of capital from 1997 through 2005 and from 2008 through 2014 and may do so in the future. Any distribution to shareholders of income or capital assets from us is accompanied by a written statement disclosing the source of the funds distributed. If, at the time of distribution, this information is not available, a written explanation of the relevant circumstances accompanies the distribution and the written statement disclosing the source of the funds is distributed to the shareholders not later than 60 days after the close of the fiscal year in which the distribution was made. In addition, we annually furnish to each of our shareholders a statement setting forth distributions during the preceding year and their characterization as ordinary income, capital gains, or return of capital.
We began making distributions to our shareholders on September 29, 1997. Monthly distributions have continued each month thereafter. As of December 31, 2014, we had paid monthly distributions for 208 consecutive months. Distributions for each of the years ended December 31, 2014, 2013, and 2012 were made at a rate of 2.90% ($0.58) based on our original share price of $20.00. The dividend portion of the distribution was 17.0% ($0.10), 31.0% ($0.18), and 40% ($0.23), per weighted share for 2014, 2013, and 2012, respectively. The portion of these distributions that did not represent a dividend represented a return of capital. The rate of return of these distributions on the NAV of outstanding shares during 2014, 2013, and 2012 was at an annualized rate of 3.91%, 3.95%, and 3.85%, respectively.
UNREGISTERED SALES OF EQUITY SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
We present below selected financial information. We encourage you to read the consolidated financial statements and the notes accompanying the consolidated financial statements in this Annual Report. This information is not intended to be a replacement for the consolidated financial statements.
| Years ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| OPERATING DATA | ||||||||||||||||||||
| Interest on loans related parties | $ | 3,586,314 | $ | 4,359,866 | $ | 4,479,806 | $ | 3,850,099 | $ | 5,697,380 | ||||||||||
| Interest on loans | 1,770,367 | 1,288,476 | 1,028,601 | 1,279,412 | 1,671,327 | |||||||||||||||
| Total interest income | 5,356,681 | 5,648,342 | 5,508,407 | 5,129,511 | 7,368,707 | |||||||||||||||
| Net interest income | 3,933,150 | 4,659,922 | 4,733,723 | 4,540,727 | 6,895,887 | |||||||||||||||
| Total expenses | 4,772,947 | 4,460,644 | 4,021,831 | 3,537,358 | 4,396,679 | |||||||||||||||
| Net income | $ | 583,734 | $ | 1,187,698 | $ | 1,486,576 | $ | 1,592,153 | $ | 2,972,028 | ||||||||||
| Add back net loss attributable to noncontrolling interest | 33,632 | - | - | - | - | |||||||||||||||
| Net income attributable to holders of shares of beneficial interest | $ | 617,366 | $ | 1,187,698 | $ | 1,486,576 | $ | 1,592,153 | $ | 2,972,028 | ||||||||||
| Net income per share of beneficial interest | $ | 0.10 | $ | 0.18 | $ | 0.23 | $ | 0.25 | $ | 0.46 | ||||||||||
| Weighted average shares outstanding | 6,434,023 | 6,437,253 | 6,439,528 | 6,432,781 | 6,422,407 | |||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| BALANCE SHEET DATA | ||||||||||||||||||||
| Cash | $ | 984,841 | $ | 1,108,300 | $ | 236,213 | $ | 363,561 | $ | 7,325 | ||||||||||
| Investment in trusts receivable | 536,084 | 653,736 | 905,659 | 1,098,797 | 1,243,638 | |||||||||||||||
| Investment in residential mortgages | 159,375 | 65,335 | 4,266,646 | 4,904,537 | 5,557,396 | |||||||||||||||
| Interim mortgages, related party | 15,830,254 | 16,282,339 | 16,285,448 | 17,319,590 | 24,638,389 | |||||||||||||||
| Interim mortgages | - | - | 35,886 | 35,886 | 248,585 | |||||||||||||||
| Allowance for loan losses | (105,462 | ) | (128,053 | ) | (314,277 | ) | (340,487 | ) | (459,361 | ) | ||||||||||
| Real estate owned, net | 4,439,004 | 5,287,857 | 8,192,368 | 11,090,796 | 15,980,479 | |||||||||||||||
| Lines of credit receivable, related parties | 90,844,122 | 86,151,485 | 88,947,361 | 78,356,781 | 69,714,261 | |||||||||||||||
| Lines of credit receivable | 15,706,986 | 8,961,704 | 4,744,680 | 4,132,639 | 4,755,129 | |||||||||||||||
| Deficiency notes | 3,258,330 | 4,976,199 | 6,121,525 | 8,063,129 | 7,301,046 | |||||||||||||||
| Deficiency notes, related parties | 28,739,855 | 29,295,567 | 29,958,940 | 29,507,820 | 12,739,093 | |||||||||||||||
| Allowance for loan losses - deficiency notes | (591,447 | ) | (1,736,306 | ) | (2,246,632 | ) | (4,757,746 | ) | (4,517,746 | ) | ||||||||||
| Recourse obligations, related parties | 20,190,990 | 20,094,279 | 18,499,829 | 18,361,710 | 18,321,173 | |||||||||||||||
| Other assets | 12,627,401 | 11,116,173 | 9,640,921 | 8,492,926 | 12,644,137 | |||||||||||||||
| Total assets | $ | 192,620,333 | $ | 182,128,615 | $ | 185,274,567 | $ | 176,629,939 | $ | 168,173,544 | ||||||||||
| Lines of credit payable | $ | 13,805,860 | $ | 7,682,920 | $ | 6,988,297 | $ | 6,680,333 | $ | 5,515,442 | ||||||||||
| Dividends payable | 311,000 | 311,000 | 311,000 | 310,000 | 310,000 | |||||||||||||||
| Participation payable, related parties | 74,686,618 | 70,835,104 | 74,699,299 | 65,503,661 | 57,050,973 | |||||||||||||||
| Other liabilities | 8,562,928 | 8,950,672 | 6,331,088 | 5,032,958 | 4,173,482 | |||||||||||||||
| Total liabilities | 97,366,406 | 87,779,696 | 88,329,684 | 77,526,952 | 67,049,897 | |||||||||||||||
| Total shareholders' equity | 91,166,523 | 94,348,919 | 96,944,883 | 99,102,987 | 101,123,647 | |||||||||||||||
| Total noncontrolling interest | 4,087,404 | - | - | - | - | |||||||||||||||
| Total liabilities and shareholders' equity | $ | 192,620,333 | $ | 182,128,615 | $ | 185,274,567 | $ | 176,629,939 | $ | 168,173,544 | ||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear in Item 8 in this Annual Report on Form 10-K.
GENERAL
In the past, we have invested in first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans” and first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages, some of which are still outstanding. Currently, our principal investment objectives are to invest proceeds from our financing proceeds, proceeds from the repayment of our loans, capital transaction proceeds and retained earnings in the following types of investments: (i) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (ii) lines of credit and loans secured by developed single-family lots, referred to as “Finished Lot Loans”; (iii) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (iv) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”; (v) to provide credit enhancements to real estate developers, homebuilders, land bankers and other real estate investors who acquire real property, subdivide real property into single-family residential lots, acquire finished lots and/or build homes on such lots referred to as “Credit Enhancements;” (vi) discounted cash flows secured by assessments levied on real property, and (vii) senior or subordinate securities backed by finished lot loans and / or development loans referred to as “Securitizations”. We collectively refer to the above listed loans as “Mortgage Investments”. We may also provide credit enhancements to real estate developers, homebuilders, land bankers and other real estate investors who acquire real property, subdivide real property into single-family residential lots, acquire finished lots and/or build homes on such lots, referred to as “Credit Enhancements”. Additionally, our portfolio includes obligations of related parties of our Advisor, which we refer to as “Recourse Obligations” and “Deficiency Notes.”
Land Development Loans are expected to have terms from 12 to 48 months. Our loans to UDF are secured by the pledge of all of UDF’s Land Development Loans and equity participations, and are subordinated to its senior debt. Finished Lot Loans, Construction Loans and builder Model Home Loans are expected to have terms of 9 to 48 months.
We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate net income for monthly distribution to our shareholders. We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).
At the end of 2014, our mortgage portfolio totaled approximately $122,971,000. Approximately 14% of our mortgages were first lien secured Interim Mortgages and Residential Mortgages, approximately 6% were secured lines of credit to UMTH Lending Co., L.P., approximately 67% were Land Development Loans, approximately 7% were Finished Lot Loans, and approximately 6% were invested in Construction Loans. As noted above, our portfolio also includes obligations of related parties of our Advisor, which we refer to as “Recourse Loans” and “Deficiency Notes.”
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We no longer invest in Interim Loans or Residential Mortgages. We plan to continue to invest in Land Development Loans, Finished Lot Loans, Construction Loans and Model Home Loans because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; and, 2) Model Home Loans and Construction Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home and Construction Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot. As we phased out of Interim Loans we increased the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans, Model Home Loans, and Construction Loans.
The following table summarizes mortgage loans by type and original loan size held by United Mortgage Trust at December 31, 2014.
| Description | No. of Loans | Interest Rate | Final Maturity Date | Periodic Payment Terms | Prior Liens | Outstanding Balance of Mortgage (1) | Carrying amount of Mortgage (2) | Past Due Amounts (3) | ||||||||||||||||||
| Single family residential 1st mortgages and interim loans (3): | ||||||||||||||||||||||||||
| Original balance over $100,000 | 1 | 7.0 | % | 1/1/16 | n/a | n/a | $ | 159,375 | $ | 135,209 | ||||||||||||||||
| Original balance $50,000 - $99,999 | 64 | 7.0% - 12.75 | % | 12/3/15 – 5/19/36 | n/a | n/a | 212,180 | 180,008 | - | |||||||||||||||||
| Original balance $20,000 - $49,999 | 121 | 9.0% - 14.50 | % | 4/1/17 – 7/1/32 | n/a | n/a | 322,166 | 273,306 | - | |||||||||||||||||
| Original balance under $20,000 | 1 | 14.50 | % | 9/1/31 | n/a | n/a | 1,738 | 1,474 | - | |||||||||||||||||
| First Lien secured interim mortgages | ||||||||||||||||||||||||||
| Ready America Funding (5) | 1 | 14.0 | % | n/a | n/a | n/a | 15,830,254 | 15,830,254 | - | |||||||||||||||||
| Secured LOC to UMTH Lending Co., L.P. (4),(5) | 1 | 12.5 | % | n/a | n/a | n/a | 7,576,966 | 7,576,966 | - | |||||||||||||||||
| Land Development Loans | ||||||||||||||||||||||||||
| UDF LOC & UDF III Economic Interest Participation | 2 | 9.25 | % | 12/31/15 | n/a | n/a | 83,267,156 | 83,267,156 | - | |||||||||||||||||
| Construction & Finished Lot Loans | 8 | 13.0 | % | 4/18/15-1/15/17 | n/a | n/a | 15,706,986 | 15,706,986 | - | |||||||||||||||||
| Totals | 199 | $ | 123,076,821 | $ | 122,971,359 | - | ||||||||||||||||||||
| (1) | Gross book value of loans. |
| (2) | Net book value of loans, net of allowance for loan losses on mortgage loans of $105,462 at December 31, 2014. |
| (3) | Amounts greater than thirty (30) days past due. |
| (4) | Lines of credit with Ready America Funding and UMTH Lending Co., L.P. are collateralized by 9 and 1 loans, respectively. |
| (5) | The Company has a first lien collateral position in these loans funded by the originator. The advances to the originator do not have specific maturity dates. |
Below is a reconciliation and walk forward of mortgage loans, net of allowance for loan losses for the year ended December 31, 2014.
| Amount | ||||
| Balance at beginning of period | $ | 111,986,546 | ||
| Additions during period: | ||||
| Increases in Mortgage loans | 207,124 | |||
| Other increases – UDF LOC | 841,123 | |||
| Other increases – UDF III EIA Participation | 3,851,514 | |||
| Investments in principal | 6,447,273 | |||
| Other (net change in allowance for loan loss) | 22,591 | |||
| Deductions during period: | ||||
| Other decreases | (384,812 | ) | ||
| Balance at close of period | $ | 122,971,359 | ||
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MATERIAL TRENDS
Housing Industry
We are a real estate investment trust and derive a substantial portion of our income from loans secured by single-family homes (both finished homes and homes under construction), single-family home lots, and entitled land under development into single-family home lots. We continue to concentrate our investment activities in Texas. We believe these areas continue to experience demand for new construction of single-family homes, however the U.S. housing market suffered declines from 2007 through 2009, particularly in geographic areas that had experienced rapid growth, steep increases in property values and speculation. However, we expect to see continued healthy demand for our products as the supply of new homes, finished lots and land is once again aligned with our market demand.
Material Trends Affecting Our Business
Housing Industry
During 2014, the U.S. housing market recovery that began in 2012 continued, with annual increases in the volume of new home sales, single-family starts and single-family permits. Housing affordability remains strong compared to historical levels, even as home prices continued to increase in 2014. We believe the main drivers of housing demand are the continued improvement in job creation and wages which have contributed to the highest consumer confidence levels since 2007. Household formations, a housing metric that had been lagging in the housing recovery, increased significantly during 2014. We believe that demand for new homes will strengthen further in 2015 as the U.S. economy continues to improve, although the improvement may be uneven from market to market based on local economic conditions. We also believe that the Federal Housing Finance Agency’s (“FHFA”) recent lowering of down payment requirements for Fannie Mae and Freddie Mac mortgage programs and the Federal Housing Administration’s decrease in mortgage insurance premiums are incremental positives for housing demand in 2015.
Competition
Real estate financing is a very competitive industry. Our principal competitors are mortgage banks and other lenders. We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, real estate investment trusts, other real estate limited partnerships and other entities engaged in real estate investment activities, many of which have greater resources than we do. Banks and larger real estate programs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the proliferation of the Internet as a tool for loan origination has made it very inexpensive for new competitors to participate in the real estate finance industry. We believe that the demand for development loans is increasing, which may cause more lenders and equity participants to enter this market. Our ability to make or purchase a sufficient number of loans and investments to meet our objectives will depend on the extent to which we can compete successfully against these other lenders, including lenders that may have greater financial or marketing resources, greater name recognition or larger customer bases than we have. Our competitors may be able to undertake more effective marketing campaigns or adopt more aggressive pricing policies than we can, which may make it more difficult for us to attract customers. Increased competition could result in lower revenues and higher expenses, which would reduce our profitability.
Regulations
All real property and the operations conducted on real property are subject to federal, state and local laws, ordinances and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Under limited circumstances, a secured lender, in addition to the owner of real estate, may be liable for clean-up costs or have the obligation to take remedial actions under environmental laws, including, but not limited to, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Some of these laws and regulations may impose joint and several liability for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell such property or to use the property as collateral for future borrowing.
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In addition, as a non-bank lender of commercial loans, we are subject to various state and federal regulations regarding usury laws. State and federal usury laws limit the interest that lenders are entitled to receive on a mortgage loan. In determining whether a given transaction is usurious, courts may include charges in the form of “points” and “fees” as “interest,” but may exclude payments in the form of “reimbursement of foreclosure expenses” or other charges found to be distinct from “interest.” While we contract for interest at a rate that is less than or equal to the applicable maximum amount of non-usurious interest and our loan documents and Texas law provide us with an opportunity to cure usurious charges, if the amount charged for the use of the money loaned is found to exceed a statutorily established maximum rate (under Texas law, the current maximum amount of non-usurious interest is 18% per annum) and we fail to cure, the form employed and the degree of overcharge are both immaterial to the determination that the loan is usurious. Statutes differ in their provision as to the consequences of a usurious loan. One group of statutes requires the lender to forfeit the interest above the applicable limit or imposes a specified penalty. Under this statutory scheme, the borrower may have the recorded mortgage or deed of trust cancelled upon paying its debt with lawful interest, or the lender may foreclose, but only for the debt plus lawful interest. Under a second, more severe type of statute, a violation of the usury law results in the invalidation of the transaction, thereby permitting the borrower to have the recorded mortgage or deed of trust cancelled without any payment (thus prohibiting the lender from foreclosing).
Employees
We have no employees; however, our general partner and an affiliate of our general partner have a staff of employees who perform a range of services for us, including originations, acquisitions, asset management, accounting, legal and investor relations.
Financial Information About Industry Segments
Our current business consists of acquiring and managing Mortgage Loans on real property. We internally evaluate our activities as one industry segment, and, accordingly, we do not report segment information.
We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that we reasonably anticipate to have a material impact on either the income to be derived from our investments in mortgage loans or entities that make mortgage loans, other than those referred to in this Annual Report on Form 10-K.
We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that we reasonably anticipate to have a material impact on either the income to be derived from our Mortgage Investments or entities that make mortgage loans, other than those referred to in this Annual Report on Form 10-K. Our future results could be negatively impacted by prolonged weakness in the economy, high levels of unemployment, a significant increase in mortgage interest rates or further tightening of mortgage lending standards.
Available Information
We electronically file an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the SEC. All documents that we file with the SEC are available free of charge on our website, which is www.unitedmorgagetrust.com.
Outlook
In summary, we believe that demand for new homes will strengthen further in 2015 as the U.S. economy continues to improve, although the improvement may be uneven from market to market based on local economic conditions. We also believe that the Federal Housing Finance Agency’s (“FHFA”) recent lowering of down payment requirements for Fannie Mae and Freddie Mac mortgage programs and the Federal Housing Administration’s decrease in mortgage insurance premiums are incremental positives for housing demand in 2015. We believe that United Mortgage Trust has been active in monitoring current market conditions and in implementing various measures to manage our risk and protect our return on our investments by shifting our portfolio to investments that are less directly sensitive to the adverse market conditions and that produce higher yields and by aggressively liquidating non-performing loans. Based on that assessment, we do not anticipate a significant disruption to our normal business operations. Nevertheless, our assessments inherently involve predicting future events and we cannot be sure of the strength of the national and regional economic recovery and its impact on the housing and mortgage lending market could cause us to suffer a higher level of delinquencies and losses than we are currently predicting and result in a material adverse impact on our business.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, and 2012
Residential Mortgages, Contracts for Deed and Interim Mortgages
As of December 31, 2014, our residential mortgage portfolio consisted of 186 residential mortgages (including 185 loans in a securitization and 1 residential mortgage owned outright). The interim mortgage portfolio consisted of 1 interim loan. The portfolio had a net unpaid principal balance (“UPB”) of approximately $16,420,000. The average performing loan in the portfolio had a current annual yield of 9.44%, accounted for approximately 1.12% of revenues, had an average UPB of $88,000, and had a remaining term of 170 months for residential mortgages and contracts for deed. Interim loans had terms of 12 months or less. The average construction loan had a term of nine months; the average rehabilitation loan had a term of six months.
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As of December 31, 2013, our residential mortgage portfolio consisted of 213 residential mortgages (including 210 loans in a securitization and 3 residential mortgages owned outright). The interim mortgage portfolio consisted of 9 interim loans. The portfolio had a net unpaid principal balance (“UPB”) of approximately $16,873,000. The average performing loan in the portfolio had a current annual yield of 9.39%, accounted for approximately 1.87% of revenues, had an average UPB of $76,000, and had a remaining term of 170 months for residential mortgages and contracts for deed. Interim loans had terms of 12 months or less. The average construction loan had a term of nine months; the average rehabilitation loan had a term of six months.
As of December 31, 2012, our residential mortgage portfolio consisted of 332 residential mortgages (including 229 loans in a securitization, 2 contracts for deed and 101 residential mortgages owned outright). The interim mortgage portfolio consisted of 10 interim loans. The portfolio had a net unpaid principal balance (“UPB”) of approximately $21,215,000. The average performing loan in the portfolio had a current annual yield of 10.90%, accounted for approximately 12.18% of revenues, had an average UPB of $62,000 and had a remaining term of 170 months for residential mortgages and contracts for deed. Interim loans had terms of 12 months or less. The average construction loan had a term of nine months; the average rehabilitation loan had a term of six months.
RESIDENTIAL MORTGAGE PORTFOLIO TABLE
| As of December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Residential mortgages owned outright | 1 | 3 | 101 | |||||||||
| Loans remaining in first securitization | 106 | 111 | 121 | |||||||||
| Loans remaining in second securitization | 79 | 99 | 108 | |||||||||
| Contracts for deed owned outright | 0 | 0 | 2 | |||||||||
| Interim mortgages | 1 | 9 | 10 | |||||||||
| Unpaid principal balance, net | $ | 16,420,000 | $ | 16,873,000 | $ | 21,179,000 | ||||||
| Annual yield | 9.44 | % | 9.39 | % | 10.90 | % | ||||||
| Percent of revenues | 1.12 | % | 1.87 | % | 12.18 | % | ||||||
| Average Loan UPB | $ | 88,000 | $ | 76,000 | $ | 62,000 | ||||||
Line of Credit, Related Party – Land Development Loans
On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note as modified by an amendment effective September 1, 2006 (the "Amendment") with UDF, a Nevada limited partnership that is a related party with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects. On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2012, the loan was extended for a period of one year and the loan amount was increased from $75,000,000 to $82,000,000. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
The Loan is secured by the pledge of all of UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”). Those UDF loans may be first lien loans or subordinate loans.
The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%. Effective October 1, 2013, the loan was extended to December 31, 2014 and the base interest rate was decreased to a rate of 9.25%. Effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
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UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the REIT provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.
On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”). On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2012, the loan was extended for a period of one year and matures on December 31, 2013, and the loan amount was increased from $75,000,000 to $82,000,000. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.
The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. At December 31, 2014 and 2013 UDF III had outstanding approximately $83,267,000 and $78,575,000 respectively, to UDF under this agreement of which approximately $74,687,000 and $70,835,000 were outstanding under the Economic Interest Participation Agreement at December 31, 2014 and 2013, respectively.
The lending facility to UDF represents the continuing evolution of the Company's investment policy away from its original investment objective of long term residential mortgages to a portfolio which consists primarily of the increase in the Loan to UDF, lot banking loans, construction loans and model home loans. The Company's Trustees believe that the interest rate environment, increasing default rates, which have resulted in lower yields from traditional residential mortgage investments and the recent broader deterioration of the sub-prime mortgage market, requires that we seek other investments that are capable of providing superior returns, credit and collateral for our shareholders. Our Trustees were also influenced by the results of our existing loan arrangement with UDF. From June 2003 through December 2014, UMT has funded to UDF approximately $128 million in first lien, subordinate loans and equity investments and received approximately $120 million in loan and equity repayments.
We anticipate the increasing concentration of our investments in the Loan, Land Development Loans, Finished Lot Loans, Model Home Loans and Construction Loans and that Residential Mortgages and Interim Loans will continue to diminish as a significant component of our total investment portfolio.
The Company monitors the line of credit for collectability on a continuing basis based on the affiliate’s payment history. No valuation allowance or charge to earnings was recorded for the years ended December 31, 2014, 2013, and 2012, based on the Company’s evaluation. Outstanding balances were approximately $83,267,000, $78,575,000, and $81,385,000, at year end 2014, 2013, and 2012, respectively.
Properties Pledged as Collateral
At year-end 2014, approximately 38% of the properties securing our Interim Loan Mortgage Investments were located in Texas, 61% in California, and 1% or less in 3 other states.
At year-end 2013, approximately 38% of the properties securing our Interim Loan Mortgage Investments were located in Texas, 61% in California, and 1% or less in 3 other states.
At year-end 2012, approximately 42% of the properties securing our Interim Loan Mortgage Investments were located in Texas, 57% in California, and 1% or less in 5 other states.
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We expect to continue acquiring loans principally in the major metropolitan areas of Texas.
Each of the properties serving as security for our Mortgage Investments is covered by a mortgagee’s title insurance policy, and in the case of residential properties, hazard insurance in an amount sufficient to cover the outstanding balance. Some of our mortgage investments are covered by full or limited recourse agreements with note sellers. In making the decision to invest in loans secured by property located in other states, we consider the availability of non-judicial foreclosure, as is available in Texas, to be the primary legal consideration. While Texas does not provide a statutory right of redemption and permits deficiency judgments, we do not rely upon those provisions in the enforcement of our liens and therefore we believe that the risks in mortgage investments in most other states will not be significantly different than those we face in Texas.
Loan Servicing
We neither buy nor sell servicing rights to the loans we purchase, nor do we retain servicing rights. Residential mortgages and contracts for deed are serviced by Prospect Service Corp., a Texas corporation, (“PSC”), a related party of our Advisor. We pay monthly loan servicing fees to Prospect Service Corp., (“PSC”), which is owned by UMTH, of 1/12th of 1/2 of 1% of the UPB of each loan. In addition, we paid a monthly loan servicing fee of 0.8% of the UPB to REOPC, a related party of our Advisor, for maintaining our foreclosed properties. This arrangement with respect to interim loans ended in the last quarter 2006; however, PSC continues to service our long term residential loans. Interim loans are serviced by us or by the entity to which we loaned funds, the majority of which are related parties of our Advisor, including UMTHLC and RAFC. We do not pay monthly servicing fees other than as listed above.
Comparative Income and Expenses
The following table summarizes revenues from related and non-related parties for the years ended December 31, 2014, 2013 and 2012:
| Twelve Months Ending | ||||||||||||||||||||||||||||||||||||||||
| Interest on loans | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| Interest income - related party | $ | 3,586,000 | (774,000 | ) | (17.75 | )% | $ | 4,360,000 | (120,000 | ) | (2.68 | )% | $ | 4,480,000 | 630,000 | 16.36 | % | $ | 3,850,000 | |||||||||||||||||||||
| Interest income | 1,770,000 | 482,000 | 37.42 | % | 1,288,000 | 259,000 | 25.17 | % | 1,029,000 | (250,000 | ) | (19.55 | )% | 1,279,000 | ||||||||||||||||||||||||||
| Total interest income | $ | 5,356,000 | (292,000 | ) | (5.17 | )% | $ | 5,648,000 | 139,000 | 2.52 | % | $ | 5,509,000 | 380,000 | 7.41 | % | $ | 5,129,000 | ||||||||||||||||||||||
The 2014 revenue decrease was primarily due to a reduction of the receipts from related party interest income from recourse obligations and by reduced balances for residential mortgages, partially offset by increased balances in non-related parties’ lines of credit. The 2013 revenue increase was primarily due to the receipt of related party interest income from recourse obligations and increased balances in non-related parties’ lines of credit, partially offset by reduced balances for residential mortgages. The 2012 revenue increase was primarily due to an increase in the receipts of related party interest income from recourse obligations, partially offset by reduced balances in both the non-related parties’ lines of credit and residential mortgages. See Liquidity and Capital Resources section for further discussion.
The 2014 decrease in related party income was due primarily to a reduction of recourse obligations receipts compared to the prior year, and a decrease in the interest to 9.25%, effective October 1, 2013, on the UDF line of credit (net of the Economic Interest Participation Agreement with UDF III) which was partially offset by the lower outstanding balance in the UMTHLC deficiency note. The 2013 decrease in related party income was due primarily to the lower outstanding balance in the UDF line of credit (net of the Economic Interest Participation Agreement with UDF III) which was partially offset by the higher outstanding balance in the UMTHLC deficiency note and the placement of certain related party Interim Loans on non-accrual status. The increases in non-related party income in 2014 and 2013 were mainly due to the increases in the balances of the non-related parties’ lines of credit outstanding.
Total expenses during 2014, 2013, and 2012, were approximately $4,773,000, $4,461,000, and $4,022,000, respectively, representing increases over the prior year of approximately $312,000 (7%), $439,000 (11%), and $485,000 (14%). The 2014 and 2013 increases were primarily due to increased interest expenses as we expanded our Construction Loan and Finished Lot Loan programs and increased provisions for loan losses, which were partially offset by a decreases in noninterest expenses (primarily lower legal fees, and real estate owned (“REO”) expenses). The 2012 increase was primarily due to the same factors, as well as increased REO expenses that year as we prepared for sale the majority of our then remaining REO properties. Such increased expenses were partially offset by a reduction in legal expenses.
PROVISION FOR LOAN LOSSES: increased 5% in 2014, increased 42% in 2013, and increased 33% in 2012, respectively.
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The increase or decrease in provisions for loan losses between years depends on how many loans are foreclosed since we create the allowance for loan losses on default rates and foreclosure trends. The tables below illustrate loss rates as a percentage of the nonrecourse portfolio for 1) Interim Loans and 2) Residential Mortgages and contracts for deed:
Interim Mortgages:
| Year | Unpaid principal balance at year ends of non-related party loans | Loan losses charged- off | Loss rate as a percentage of non-related party loans | |||||||||
| 2014 | - | - | - | |||||||||
| 2013 | - | $ | 36,000 | 100.00 | % | |||||||
| 2012 | $ | 36,000 | - | 0.00 | % | |||||||
Residential Mortgages and Contracts for Deed:
| Year | UPB including securitized loans | Loan losses charged- off | Loss rate as a percentage of loans | |||||||||
| 2014 | $ | 5,111,000 | $ | 192,000 | 3.76 | % | ||||||
| 2013 | $ | 5,450,000 | $ | 442,000 | 8.11 | % | ||||||
| 2012 | $ | 10,179,000 | $ | 604,000 | 5.93 | % | ||||||
Loan loss reserves are established when (a) the collectability of current loan balances becomes uncertain or (b) the underlying collateral value for foreclosed properties is less than its carrying value. For current loan balances, a loan loss reserve is created based on a three year look back of historical default rates, as well as a specific analysis on a loan by loan basis. The Company increased its provision for loan losses in 2014, 2013 and 2012, in order to ensure adequate reserves over the long-term based on our assessment of market conditions. The increase in 2014 and 2013 was driven primarily by efforts to liquidate the foreclosed property portfolio. The Company’s three year historical default rate for residential mortgages is approximately 0.54% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for interim mortgages is approximately 0.00%. The Company continually monitors the adequacy of its loan loss reserves and will provide for additional reserves in the future if needed. The Company charges additions to the loan loss reserves to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against, or charged-off, and decrease the loan loss reserve, while amounts recovered on previously charged off accounts increase the loan loss reserve.
INTEREST EXPENSE: Increased 44% in 2014, increased 28% in 2013, and increased 32% in 2012.
Interest expense was approximately $1,424,000, $988,000, and $775,000, respectively, in 2014, 2013, and 2012. The consecutive increases were due to the addition of new bank lines of credit during this time period, as well as increased utilization of these lines in concert with our expanding Construction Loan and Finished Lot Loan lending. As of December 31, 2014, 2013 and 2012, the Company had aggregate lines of credit totally approximately $13,806,000, $7,683,000 and $6,988,000, respectively and average note payable borrowings outstanding during the years then ended were $11,093,000, $7,065,000 and $7,149,000, respectively. We used our credit facilities to provide additional funds for investment. The use of our credit facilities, depends on the number of suitable investments available at any given time and the amount of cash we have on hand. Interest expense fluctuates based on (1) how heavily we rely on our credit facilities and (2) the increase or decrease in the interest rate we pay under the credit facilities. See the “Liquidity and Capital Resources” section for further discussion.
LOAN SERVICING FEES: Decreased 86% in 2014, decreased 76% in 2013, and decreased 9% in 2012, respectively.
Loan servicing fees paid to Prospect Service Corp. (“PSC”) for servicing some of our Mortgage Investments decreased as a result of the amount we had invested in Residential Mortgages which decreased approximately 80% in 2014, 74% in 2013 and 13% in 2012. Decreases in the loan servicing fee should occur as the long-term mortgage portfolio decreases. Loan servicing fees were approximately $1,000, $5,000, and $19,000, in 2014, 2013, and 2012, respectively.
TRUST ADMINISTRATION FEES: Remained constant in 2014 and 2013, and 2012.
Trust administration fees are paid to our Advisor and are calculated as the lesser of i) 1% of our average invested assets, or ii) $1 million. The trust administration fee increases and decreases as our invested assets increase or decrease as we draw on or pay down the credit facility that we use to acquire mortgage investments. For the past three years, the fees paid were equal to the $1 million limitation above.
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GENERAL AND ADMINISTRATIVE EXPENSES: Decreased 16% in 2014, decreased 13% in 2013, increased 5% in 2012.
General and administrative expenses (including related parties) were approximately $928,000, $1,111,000, and $1,270,000, respectively, in 2014, 2013, 2012. The major categories of general and administrative expenses include transfer agent fees, legal fees, printing and reproduction costs, accounting and audit fees, recording fees, expenses to maintain REO properties, Trustee fees and insurance. The decrease in 2014 resulted from lower legal fees, lower REO expenses from the continued liquidation of the related REO properties, with increases in commission expenses, and accounting services. The decrease in 2013 resulted from lower REO expenses from the continued liquidation of the related REO properties in 2013 with increases in accounting and audit expenses, partially offset by lower legal fees. The increase in 2012 resulted from higher REO expenses related to readying properties for sale and accounting and audit fees partially offset by lower legal fees.
Operating expense as a percentage of interest revenue was approximately 36%, 37%, and 42% for 2013, 2012, respectively. Operating expense as a percentage of average invested assets was approximately 1.02%, 1.26%, and 1.56%, for 2014, 2013, and 2012, respectively.
Net income was approximately $617,000, $1,188,000, and $1,487,000, for 2014, 2013, and 2012, respectively, representing a decrease of approximately 48%, 20%, and 7%, respectively, for the same periods. The decrease in 2014 was primarily due to lower related party interest income, from a reduction in certain related party interest rates in October 2013 and a reduction in recourse obligation interest income, offset by an increase in non-related parties’ interest income from higher outstanding loan receivable balances. The decrease in 2013 was primarily due to a reduction of related party interest income, from a reduction in related party interest rates in 2013, offset by an increase in non-related parties’ interest income from higher outstanding loan receivable balances, and the decrease in 2012 was driven by a reduction of non-related party interest income, from a reduction in the long - term residential mortgage portfolio. Earnings per share of beneficial interest in 2014, 2013, and 2012, were $0.10, $0.18, and $0.23, for the respective years. Daily use of leverage was approximately $11.1 million in 2014, as compared to $7.1 million in 2013, and 2012. Performing Mortgage Investment yields were approximately 9.44%, 9.39%, and 10.90%, in 2013, 2012, respectively, further impacting earnings. Average daily cash balances were $628,000 in 2014, compared to $1,030,000 in 2013, and to $740,000 in 2012, again positively or negatively impacting earnings in successive years.
URHF Preferred Equity Offering
On February 24, 2014, United Residential Home Finance, L.P. (“URHF”) initiated a private offering of Preferred Limited Partner Equity Units (“Preferred Equity Units”) to accredited investors (“Preferred Equity Unit Holders”). The Preferred Equity Units to Preferred Equity Unit Holders are being offered by URHF. URHF is a Delaware limited partnership formed for the purpose of investing in loans made to fund the acquisition of land and development of single family lots, loans for the acquisition of finished lots, loans secured by model homes and loans for the construction of new homes (“Loans”). URHF will issue up to $15.5 million in 5.5% Preferred Limited Partner Equity Units to Preferred Equity Unit Holders who will become Limited Partners in URHF. Each Preferred Equity Unit represents a 0.3225% ownership interest in the Partnership based upon a total of three hundred ten (310) Preferred Units. Preferred Equity Unit ownership interest does not include a General Partner Interest or a Limited Partner Interest owned by the Original Limited Partner, United Mortgage Trust. The offering of the Preferred Equity Units is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. As of December 31, 2014, 84 Preferred Units have been sold for $4,194,000. The Preferred Equity Units are reflected as Noncontrolling Interest on the consolidated financial statements.
Foreclosed Properties
Related Party Foreclosed Properties. We do not reclassify foreclosed loans that have been pledged to us as collateral (an “underlying loan”) for recourse loans we have made to related parties of our Advisor, because the related parties are obligated to perform under the term of those recourse loans with us (“related parties loans”). If the borrower on an underlying loan defaults, the related party has the option to accrue interest payable to us while they bring the underlying loan current in its payments. We, in turn, accrue an interest receivable on the recourse loan. When the underlying loan becomes a paying loan again, the related party resumes paying us interest on the recourse loan. If the underlying loan is foreclosed and the real estate sells, our related party pays us all accrued interest and principal from the proceeds from the sale of the property. Any deficiency is reclassified to Recourse Obligations, related parties or Deficiency Notes, related parties.
Non-related Party Foreclosed Properties. We began 2014, 2013, and 2012, with zero, one, and two foreclosed Residential Mortgages and contracts for deed, respectively, and foreclosed an additional zero, eight, and four loans during the respective years. We sold nine and five foreclosed properties in 2013 and 2012, respectively, leaving zero, zero, and one, foreclosed properties at the end of each of the three years, respectively. Non-related party foreclosed properties as a percentage of total non-related party Residential Mortgages and contracts for deed at year end 2014, 2013, and 2012 were 0.00%, 0.00%, and 0.60%, respectively.
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We began 2014, 2013, and 2012, with 20, 25, and 84 foreclosed Interim Loans, respectively, and foreclosed one additional Interim Loan in 2013. We sold nineteen, six, and fifty-nine foreclosed properties, during 2014, 2013, and 2012, respectively, leaving 1, 20, and 25 foreclosed interim loans at the respective year ends. In December of 2006 we ceased funding interim loans for the construction of single family homes originated by a non-related party lender, Residential Development Corporation (“RDC”) and began liquidating properties securing RDC non-performing loans.
At December 31, 2014 our foreclosed property portfolio consisted of one residential property, which was not a rental property. Our exit strategy for these properties is to dispose of them, over time, and recover our cost. This includes marketing available properties for sale or rental including providing seller financing to qualified third party buyers. Active rental properties can be seasoned over time and, if the tenant can then qualify for third party or seller financing, the property can then be sold and its cost recovered. These rental properties also provide cash flow to the Company during this process and reduce our holding costs.
In December 2006, we ceased funding individual Interim Loans for the construction of single family homes. In 2008, we completed foreclosure on the remaining non-performing Interim Loans funded to RDC. As a result, our outstanding balance of Interim Loans to non-related parties was $0 at December 31, 2014 and December 31, 2013 and $36,000 at December 31, 2012, respectively.
The following tables detail major categories of foreclosed loans for each of the last three fiscal years:
| RESIDENTIAL MORTGAGES & CFDs | 2014 | 2013 | 2012 | |||||||||
| Number of loans defaulted at beginning of year | 0 | 1 | 2 | |||||||||
| Aggregate gross value | $ | - | $ | 61,000 | $ | 106,000 | ||||||
| Additional defaults during year | 0 | 8 | 4 | |||||||||
| Aggregate gross value | $ | - | $ | 297,000 | $ | 151,000 | ||||||
| Defaulted properties disposed of during year | 0 | 9 | 5 | |||||||||
| Aggregate gross value | $ | - | $ | 358,000 | $ | 196,000 | ||||||
| Number of loans defaulted at end of year | 0 | 0 | 1 | |||||||||
| Aggregate gross value | $ | - | $ | - | $ | 61,000 | ||||||
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| INTERIM LOANS | 2014 | 2013 | 2012 | |||||||||
| Number of loans defaulted at beginning of year | 20 | 25 | 84 | |||||||||
| Aggregate gross value | $ | 510,000 | $ | 2,542,000 | $ | 5,511,000 | ||||||
| Additional defaults during year | 0 | 1 | - | |||||||||
| Aggregate gross value | $ | - | $ | 48,000 | $ | - | ||||||
| Defaulted properties disposed of during year | 19 | 6 | 59 | |||||||||
| Aggregate gross value | $ | 456,000 | $ | 2,080,000 | $ | 2,970,000 | ||||||
| Number of loans defaulted at end of year | 1 | 20 | 25 | |||||||||
| Aggregate gross value | $ | 54,000 | $ | 510,000 | $ | 2,542,000 | ||||||
Changes in Our Mortgage Portfolio
The Company no longer purchases Interim Loans, Residential Mortgages or contracts for deed and their balances will decrease over time as the existing portfolios liquidate. We plan to continue to invest in Land Development Loans, Finished Lot Loans, Model Home Loans and Construction Loans secured by conventionally built houses because (1) land development loans and finished lot loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; (2) interim loans, while offering full recourse from our borrowers and attractive yields are dependent on sub-prime mortgage products to facilitate the sale of the properties securing our loans; and (3) model home and construction loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. In addition, blended yields for land development loans and finished lot loans have produced higher returns than those of residential mortgages and contracts for deed. Model home and construction loans are expected to produce higher yields commensurate with land development loans, finished lot loans and interim loans. As we phased out of Interim Loans and Residential Mortgages we have increased the percentage of our portfolio invested in land development loans, finished lot loans, model home loans and construction loans.
The table below summarizes our gross mortgage portfolio by asset type as of December 31, 2014, 2013, and 2012:
| Category | 2014 | 2013 | 2012 | |||||||||
| First lien secured interim mortgages 12 months or less and residential mortgages and contracts for deed | $ | 16,526,000 | $ | 17,001,000 | $ | 21,494,000 | ||||||
| Secured, LOC to UMTHLC | 7,577,000 | 7,577,000 | 7,562,000 | |||||||||
| Land development loans | 83,267,000 | 78,575,000 | 81,386,000 | |||||||||
| Finished lot loans | 8,955,000 | 717,000 | 2,152,000 | |||||||||
| Construction loans | 6,752,000 | 8,244,000 | 2,593,000 | |||||||||
Deficiency Notes – Related Party and Non-Related Party
The Company has made loans in the normal course of business to related parties and non-related parties, the proceeds from which have been used to originate underlying loans that are pledged to the Company as security for such obligations. When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full. If the borrower or the Company forecloses on property securing an underlying loan, or if the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.
As of December 31, 2014, the Company had two deficiency notes with non-related parties in the aggregate amount of approximately $4,976,000. One note in the amount of approximately $1,725,000 bears interest at a rate of 14% per annum. The second note is for the amount of approximately $1,533,000, with a reserve of approximately $591,000, does not accrue interest as the underlying collateral value approximates the note balance, net of reserves.
As of December 31, 2013, the Company had two deficiency notes with non-related parties in the aggregate amount of approximately $4,976,000. One note in the amount of approximately $1,725,000 bears interest at a rate of 14% per annum. The second note is for the amount of approximately $3,251,000, with a reserve of approximately $1,736,000, does not accrue interest as the underlying collateral value approximates the note balance, net of reserves.
Please see Part III Item 13 “Certain Relationships and Related Transactions” for a detailed description of the Company’s transactions with related parties.
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Dividends and Distributions
For the year ended December 31, 2014, we have made the following distributions to our shareholders of beneficial interest:
| Period Ended | Date Paid | Distribution Amount | ||||
| December 31, 2013 | January 29, 2014 | $ | 310,900 | |||
| January 31, 2014 | February 28, 2014 | 310,824 | ||||
| February 28, 2014 | March 28, 2014 | 311,000 | ||||
| March 31, 2014 | April 29, 2014 | 310,860 | ||||
| April 30, 2014 | May 30, 2014 | 310,817 | ||||
| May 31, 2014 | June 26, 2014 | 310,767 | ||||
| June 30, 2014 | July 31, 2014 | 310,801 | ||||
| July 31, 2014 | August 28, 2014 | 310,743 | ||||
| August 31, 2014 | September 26, 2014 | 310,708 | ||||
| September 30, 2014 | October 30, 2014 | 310,717 | ||||
| October 31, 2014 | November 25, 2014 | 310,631 | ||||
| November 30, 2014 | December 29, 2014 | 310,640 | ||||
| $ | 3,729,408 | |||||
For the year ended December 31, 2014, we have made the following distributions to our preferred limited partners of URHF:
| Period Ended | Date Paid | Distribution Amount | ||||
| June 30, 2014 | July 21, 2014 | 8,122 | ||||
| September 30, 2014 | October 23, 2014 | 19,842 | ||||
| December 31, 2014 | December 31, 2014 | 45,000 | ||||
| $ | 72,964 | |||||
For the year ended December 31, 2014, we paid distributions of $3,802,372 ($3,584,574 in cash and $217,798 in shares of beneficial interest pursuant to our DRP), as compared to cash flows from operations of ($2,745,151). For the year ended December 31, 2013, we paid distributions of $3,731,445 ($3,506,962 in cash and $224,483 in shares of beneficial interest pursuant to our DRP), as compared to cash flows from operations of $26,367. For the period from our inception through December 31, 2014, we paid distributions of approximately $104.8 million (approximately $81.7 million in cash and approximately $23.1 million in shares of beneficial interest pursuant to our DRP), as compared to cumulative cash flows from operations of approximately $83.3million and cumulative net income of approximately $85.3 million.
The distributions to our shareholders paid during the years ended December 31, 2014 and 2013, along with the amount of distributions reinvested pursuant to our DRP and the sources of our distributions were as follows:
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Distributions paid in cash | $ | 3,584,574 | $ | 3,506,962 | ||||||||||||
| Distributions reinvested | 217,798 | 224,483 | ||||||||||||||
| Total distributions | $ | 3,802,372 | $ | 3,731,445 | ||||||||||||
| Source of distributions: | ||||||||||||||||
| Cash flow from operations | $ | (2,745,151 | ) | (72 | )% | $ | 26,367 | 1 | % | |||||||
| Proceeds from issuance of shares | 217,798 | 6 | % | 224,483 | 6 | % | ||||||||||
| Borrowing under credit facilities and notes payable | 6,329,725 | 166 | % | 3,480,595 | 93 | % | ||||||||||
| Total sources | $ | 3,802,372 | 100 | % | $ | 3,731,445 | 100 | % | ||||||||
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Distributions per share of beneficial interest were $0.58, per weighted share for 2014, 2013, and 2012, on earnings of $0.10, $0.18, and $0.23, respectively. In 2014, 2013, 2012 we distributed approximately 639%, 314%, and 251%, respectively, of our net income. The portion of the distributions that does not represent earnings represents return of capital. (See the table below.) Distributions declared by our Trustees during 2014, 2013, and 2012, were at an annualized rate of return of 2.9% based on our original share price of $20.00. The rate of return of these distributions on the NAV of outstanding shares during 2014, 2013, and 2012 was at an annualized rate of 3.91%, 3.95% and 3.85%, respectively. We are under no obligation to pay dividends at that same rate and from time to time the rate at which we pay dividends may be adjusted by our Trustees.
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| For the Years Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Dividend paid per Share | $ | 0.58 | $ | 0.58 | $ | 0.58 | ||||||
| Amount paid in excess of earnings per Share (return of capital) | $ | 0.49 | $ | 0.40 | $ | 0.35 | ||||||
Effective April 15, 2015, pursuant to the terms of the DRP, the Board of Trustees elected to suspend the DRP until further notice. Please refer to our Report on Form 8-K filed on March 3, 2015 for further information about the modification to the DRP.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEARS ENDED
DECEMBER 31, 2014, 2013, and 2012
Sources and Uses of Funds
Cash flows from operating activities are generally the result of net income adjusted for provision for loan losses and changes in accrued interest receivable, accounts payable and accrued liabilities. Cash (used in) provided by operations was approximately ($2,745,000), $26,000, and $680,000 during the years ended December 31, 2014, 2013, and 2012, respectively.
Cash flows from investing activities generally reflect fundings and payments received from lending activities. In 2014 the Company used cash in investing activities of approximately ($5,052,000). The Company provided cash from investing activities of approximately $1,409,000 and $1,601,000 in 2013 and 2012, respectively, from deficiency and recourse note receipts along with receipts from sales of real estate owned.
Cash flows from financing activities generally reflect proceeds from the issuance of shares, borrowings or repayments on the lines of credit, the purchase of treasury stock and the payment of dividends. In 2014 the Company was provided cash from financing activities of approximately $7,674,000. The Company used approximately $564,000 and $2,408,000 in financing activities in 2013 and 2012, respectively. The primary uses were the purchase of treasury stock and the payment of dividends and primary sources were proceeds from the issuance of shares and from borrowings on the lines of credit and notes payable.
The table below provides information regarding the Company’s weighted average yield earned on assets and the weighted average cost of funds during the years ended December 31, 2014, 2013 and 2012.
| 2014 | 2013 | 2012 | ||||||||||
| Average Earnings Assets and Income | ||||||||||||
| Average earning asset balances | $ | 79,618,406 | $ | 72,996,034 | $ | 72,199,489 | ||||||
| Total interest income | 5,356,681 | 5,648,342 | 5,508,407 | |||||||||
| Average annual yield | 6.73 | % | 7.74 | % | 7.63 | % | ||||||
| Weighted average cost of capital | ||||||||||||
| Average debt capital balances | $ | 18,298,151 | $ | 12,203,616 | $ | 9,322,445 | ||||||
| Annual interest expense | 1,423,531 | 988,420 | 774,684 | |||||||||
| Average cost of debt capital | 7.78 | % | 8.10 | % | 8.31 | % | ||||||
| Percent of total capital | 16.51 | % | 11.32 | % | 8.69 | % | ||||||
| Average equity capital balances | $ | 92,505,966 | $ | 95,555,608 | $ | 97,996,123 | ||||||
| Distributions | 3,802,372 | 3,731,445 | 3,733,422 | |||||||||
| Average cost of equity capital | 4.11 | % | 3.91 | % | 3.81 | % | ||||||
| Percent of total capital | 83.49 | % | 88.68 | % | 91.31 | % | ||||||
| Total average capital | $ | 110,804,118 | $ | 107,759,224 | $ | 107,318,568 | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
| Weighted average cost of capital | 4.72 | % | 4.38 | % | 4.20 | % | ||||||
| Net yield on earning assets | 2.01 | % | 3.36 | % | 3.43 | % | ||||||
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Credit Facilities
UMT HF Texas Capital Bank LOC
During August 2009, the Company entered into a revolving line of credit facility with Texas Capital Bank (“TCB”) for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest were due at maturity, which was August 2012. Effective September 2012, the line was renewed under the same terms and matures on September 5, 2015. The line of credit is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $4,454,000, and $4,376,000 at December 31, 2014 and 2103, respectively. This credit facility contains financial covenants that require UMT Home Finance, L.P. (“UMTHF”) to maintain a leverage ratio, tangible net worth and net income within certain bounds as proscribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014 and 2013, the Company was in compliance with all of its debt covenants.
UMT 15th Street, L.P. Community Trust Bank Loan
On April 21, 2010, the Company entered into a term loan credit facility with Community Trust Bank (“CTB”) for $1,600,000. The note payable bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest were due at maturity which was October 21, 2012. The term loan credit facility was extended, effective December 21, 2012, with an amended maturity date of December 19, 2013, and an interest rate reduction from 7.0% to 5.5%. Effective February 19, 2014, a modification extended the maturity date to February 19, 2015. Effective February 18, 2015, a modification was executed extending the maturity date to July 30, 2016. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013, was approximately $569,000.
UMT HF II Notes Payable
On January 27, 2011, the Company initiated a private offering of Secured Subordinated Notes (“Notes,” to accredited investors “Note Holders”). The Notes are being offered through a wholly - owned subsidiary, UMT Home Finance II, L.P. (“HF II”). HF II is a Delaware limited partnership that was formed on November 29, 2010 as a Special Purpose Entity, for the purpose of originating and holding loans made to fund the acquisition of finished lots and the construction of single-family homes on the subject lots (“Loans”). HF II will issue up to $5 million in 7.5% Notes. The Notes will be secured by an undivided security interest on the pool of loans owned by HF II. The offering of the Notes is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933. Periodic payments are due and payable through December 2019. As of December 31, 2014 and 2013, approximately $4,749,000, and $4,275,000, respectively, were outstanding through individual notes.
UMT HF Notes Payable
As of December 31, 2014 and 2013, the Company had twenty-three and ten notes payable to various unrelated parties totaling approximately $2,103,000 and $1,347,000, respectively. Periodic payments are due and payable through December 2019. These notes bear interest at the rate of 7.5% per annum and require interest only payments on a monthly basis. These notes are secured by an undivided security interest in the pool of construction loans funded for the construction of single-family homes by UMTHF a wholly owned and consolidated subsidiary of the Company.
UMT HF III Veritex Community Bank LOC
On May 27, 2011, the Company entered into a revolving line of credit facility with Veritex Community Bank (“VCB”) for $4,300,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which was May 27, 2014. Effective May 27, 2014 this term line of credit facility was renewed with the lender, the loan commitment was increased to $5,000,000 and principal and all unpaid interest will be due at maturity, May 27, 2017. All other terms remain the same. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $3,618,000, and $1,593,000, respectively. This credit facility contains a financial covenant that requires UMT Home Finance III, L.P. (“UMTHF III”) to maintain a leverage ratio within certain bounds as prescribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
UMT HF II Green Bank LOC
On October 26, 2011, the Company entered into a revolving line of credit facility with Green Bank for $5,000,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest was due at maturity which on October 26, 2014. The loan was extended to January 26, 2015 and has not been renewed by the bank. The Company is pursuing refinancing this loan with another bank under the same terms. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014, and 2013 was approximately $697,000 and $546,000, respectively. This credit facility contains financial covenants that require HF II to maintain a leverage ratio, tangible net worth and total liabilities to tangible net worth within certain bounds as proscribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
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URHF Southwest Bank LOC
On July 22, 2013, the Company entered into a revolving line of credit facility with Southwest Bank (“SWB”) for $15,000,000. The loan bears interest at prime plus one percent, with a floor of 4.75%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is January 16, 2015 for $3,199,670 and May 6, 2017 for $1,837,665. The loan balance that matured on January 16, 2015 was renewed under the same terms with a new maturity date of January 16, 2018. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $5,037,000 and $1,167,000, respectively. This credit facility contains financial covenants that require United Residential Home Finance, L.P. (“URHF”) to maintain an interest coverage ratio, tangible net worth and leverage ratio within certain bounds as proscribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
Below is a Five Year Maturity Schedule of all lines of credit payable:
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||
| Lines of Credit Payable Maturity | $ | 8,351,000 | $ | - | $ | 5,455,000 | $ | - | $ | - | $ | - | $ | 13,806,000 | ||||||||||||||
Below is a Five Year Maturity Schedule of all notes payable:
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||
| Notes Payable Maturity | $ | 569,000 | $ | 300,000 | $ | 1,239,000 | $ | 4,375,000 | $ | 937,000 | $ | - | $ | 7,420,000 | ||||||||||||||
DRP Funds
We use funds made available from our DRP, funds made available under bank lines of credit and the proceeds from repayments of principal and interest on loans we have made to purchase Mortgage Investments. We do not have commitments to purchase any Mortgage Investments but rather purchase them as funds are available. Dollars are approximate. Shares of [common stock/beneficial interest] are offered under our DRP without the payment of any commissions.
| December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Shares issued | 14,900 | 15,082 | 20,625 | |||||||||
| Dividend reinvestment proceeds | $ | 218,000 | $ | 224,000 | $ | 316,000 | ||||||
| Number of shares returned to treasury | (19,708 | ) | (17,845 | ) | (18,514 | ) | ||||||
| Value of shares repurchased | $ | (288,000 | ) | $ | (277,000 | ) | $ | (228,000 | ) | |||
| Principal receipts: | ||||||||||||
| First lien mortgage notes and trust receivables | $ | 181,000 | $ | 2,499,000 | $ | 779,000 | ||||||
| Real estate owned (investments) | $ | 141,000 | $ | 700,000 | $ | 854,000 | ||||||
| Interim loans and deficiency notes | $ | 2,000 | - | - | ||||||||
| Interim loans and deficiency notes, related parties | $ | 671,000 | $ | 2,135,000 | $ | 1,374,000 | ||||||
| Net receipts (fundings) - lines of credit | $ | (6,045,000 | ) | $ | (4,217,000 | ) | $ | (612,000 | ) | |||
| Net receipts (fundings) - lines of credit, related parties | - | $ | (15,000 | ) | $ | (572,000 | ) | |||||
| Net borrowings (payments)–bank lines of credit | $ | 6,123,000 | $ | 695,000 | $ | 308,000 | ||||||
| Sale of preferred equity unites in URHF | $ | 4,194,000 | - | - | ||||||||
| Net proceeds from notes payable | $ | 1,230,000 | $ | 2,526,000 | $ | 929,000 | ||||||
As of December 31, 2014, we had issued an aggregate of 8,375,363 shares, with 1,943,403 shares repurchased and retired to treasury, leaving 6,431,960 shares outstanding. Total capital raised from share issuances was approximately $166,695,000.
As of December 31, 2013, we had issued an aggregate of 8,360,463 shares, with 1,923,695 shares repurchased and retired to treasury, leaving 6,436,767 shares outstanding. Total capital raised from share issuances was approximately $166,477,000.
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As of December 31, 2012, we had issued an aggregate of 8,345,381 shares, with 1,905,850 shares repurchased and retired to treasury, leaving 6,439,531 shares outstanding. Total capital raised from share issuances was approximately $166,252,000.
Since inception and as of December 31, 2014, we have invested an aggregate of approximately $539 million in Interim Loans from various sources, and UDF had drawn down an aggregate of approximately $129.3 million from us on its Loan. In 2014 we funded no Interim Loans and approximately $841,000 in draws to UDF, compared to approximately $1,053,000 in draws to UDF in 2013. The following table sets forth, as a percentage of total funds invested with all sources, the percentage of Mortgage Investments made to related parties during 2014, 2013, and 2012.
| Related Party Company | 2014 | 2013 | 2012 | |||||||||
| UMTHLC | 0 | % | 0 | % | 2 | % | ||||||
| UDF | 2 | % | 4 | % | 3 | % | ||||||
| Total of related party mortgage investments | 2 | % | 4 | % | 5 | % | ||||||
The following table shows the dollar amounts of investments funded with related parties of our Advisor in the three comparable years:
| Related Party Company | 2014 | 2013 | 2012 | |||||||||
| UMTHLC | - | $ | 15,000 | $ | 587,000 | |||||||
| UDF | $ | 841,000 | $ | 1,053,319 | $ | 823,000 | ||||||
In addition, we no longer fund draws directly to RAFC, but we do fund draws directly to vendors for projects that are active and serviced by RAFC.
Outstanding balances for Interim Loans purchased from related parties of our Advisor and the UDF line of credit at December 31, 2014, 2013, and 2012 were:
| Related Party Company | 2014 | 2013 | 2012 | |||||||||
| RAFC | $ | 15,830,254 | $ | 16,282,000 | $ | 16,285,000 | ||||||
| UMTHLC | $ | 7,577,000 | $ | 7,577,000 | $ | 7,562,000 | ||||||
| UDF | $ | 83,267,000 | $ | 78,575,000 | $ | 81,385,000 | ||||||
We no longer purchase Interim Loans, Residential Mortgages or contracts for deed.
Transactions with Related Parties
We do not have any direct employees. All administrative services and facilities are provided to us by our Advisor, UMTHGS, under the terms of an August 1, 2006 Advisory Agreement, amended and restated as of January 1, 2013 (the “Advisory Agreement”). The services of our Advisor include all day-to-day administrative services including managing our development of investment guidelines, overseeing servicing, negotiating purchases of loans and overseeing the acquisition or disposition of investments and managing our assets. We pay UMTHGS a monthly trust administration fee, depending on our annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month, however, our Advisor has limited the annual trust administration fee to the lesser of i) 1% of our average invested assets, or ii) $1,000,000. The Advisory Agreement also provides for a subordinated incentive fee equal to 25% of the amount by which our net income for a year exceeds a 10% per annum non-compounded cumulative return on our adjusted contributions. No incentive fee was paid during 2014, 2013, or 2012. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2014, 2013, and 2012, the Advisor has not received options to purchase shares under this arrangement.
The Advisor and its related parties are also entitled to reimbursement of costs of goods, materials and services obtained from non-related parties for our benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for us or to dispose of any of our investments. During each of 2014, 2013, and 2012, the Company paid the Advisor approximately $76,000 as reimbursement for costs associated with providing shareholder relations activities.
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The Advisory Agreement provides for the Advisor to pay all of our expenses and for us to reimburse the Advisor for any third-party expenses that should have been paid by us but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by us) and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from us.
The Advisory Agreement also provides for us to pay to the Advisor a debt placement fee. We may engage the Advisor, or a related party of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit. The Company paid debt placement fees of approximately $150,000 in August 2013, respectively, to a related party of the Advisor. These fees are amortized monthly, as an adjustment to interest expense, over the term of our credit facility agreements. For a more detailed description of these credit facility agreements, please see Note D of the Notes to Consolidated Financial Statements below.
Loan servicing fees are paid to PSC. The fees are paid monthly and calculated as 1/12th of 1/2% and 0.8% of the outstanding principal balance of each loan or value of each property, respectively. In addition, each received real estate sales commissions on a scale of 1% to 4% of the sales price of a foreclosed property when the property is liquidated.
Below is a chart listing fees paid to the Advisor and PSC in the past three years:
| Type of Fee | Payee | 2014 | 2013 | 2012 | ||||||||||
| Trust management fee, net | UMTHGS | $ | 1,000,000 | $ | 1,000,000 | $ | 1,000,000 | |||||||
| Investor relations service fee | UMTHGS | $ | 78,000 | $ | 76,000 | $ | 76,000 | |||||||
| Loan servicing fees | PSC | $ | 1,000 | $ | 5,000 | $ | 19,000 | |||||||
Critical Accounting Policies
We have prepared our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP represents a comprehensive set of accounting and disclosure rules and requirements, the application of which requires management judgments and estimates. In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, we have identified the most critical accounting policies upon which our financial statements are based as follows:
Interest Income Accrual
The Company’s portfolio of Residential Mortgages, contracts for deed, Interim Loans and lines of credit produce monthly interest income; however, the Company may not receive interest income on a particular loan if a borrower fails to make its monthly interest payment.
The Company has two types of loans and its accrual method differs for them: nonrecourse loans and recourse loans.
A nonrecourse loan is one that is not currently covered under a recourse agreement. The majority of the Company’s nonrecourse loans are Residential Mortgages and contracts for deed.
A recourse loan is one that is covered under a recourse agreement that obligates either a third party guaranteeing the performance of a loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan to the Company if the underlying borrower defaults. The majority of the Company’s recourse loans are Interim Loans made to borrowers that make corresponding loans which are pledged to the Company as security for the borrower's obligations to the Company. All loans that the Company makes to related parties of its Advisor are recourse loans.
With respect to nonrecourse loans, the Company will accrue interest, if based on the underlying borrower’s payment history and based on analysis by the loan servicing staff, when applicable, it is determined that the likelihood of an interest payment being made is probable. The Company will cease accruing interest when the likelihood that an interest payment will be made is less than probable, generally if a payment is more than 90 days past due. If and when the loan is foreclosed, the Company no longer considers the property to be income producing and reclassifies it as foreclosed.
With respect to recourse loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable. Interest on recourse loans continues to accrue until the loan is fully paid off. We are reserving for accrued interest and then recognizing revenue, by releasing reserves, upon receipt of payments.
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There is no assurance that the interest income accrued by the Company will be paid by a borrower. When income is accrued with respect to a foreclosed loan, the Company sells the mortgage property and receives proceeds from the sale. The Company first applies the proceeds to any accrued interest related to the loan and then applies the balance of the proceeds to the outstanding loan balance. If the proceeds from the sale of the property are not sufficient to reduce the outstanding loan balance to zero, the remaining balance is referred to as the “charge-off amount.” The charge-off amount is recorded against the mortgage investment loss reserve: accrued interest income, plus the outstanding loan balance, less proceeds from the sale of the property equals the amount charged-off against loss reserves. If the loan was a recourse loan, the Company’s borrower or a guarantor is obligated to pay the remaining balance with interest and the borrower or guarantor, as applicable, would deliver a deficiency note (“deficiency note”) to the Company for the remaining balance.
On March 30, 2006, but effective as of December 31, 2005, all outstanding amounts owed by certain of the Company’s related parties under (1) loans made by the Company to such related parties, (2) deficiency notes from such related parties to the Company and (3) the estimated maximum future liability to the Company under recourse arrangements, were consolidated into secured, variable amount promissory notes delivered by such related parties to the Company, and reflected as recourse obligations in the accompanying balance sheets.
Loan Loss Reserves
Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. The Company’s three year historical default rate for Residential Mortgages is approximately 0.54% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for Interim Loans is approximately 0%. The Company charges additions to the loan loss reserves to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against, or “charged-off and decrease the loan loss reserves, while amounts recovered on previously charged off accounts increase the reserve.
The changes in the reserve for loan losses during the years ended December 31, 2014, 2013, and 2012 are summarized as follows:
| Walk forward of Loan Loss Reserves: | 2014 | 2013 | 2012 | |||||||||
| Balance, beginning of year | $ | 2,555,000 | $ | 3,061,000 | $ | 5,714,000 | ||||||
| Provision for loan losses | 1,420,000 | 1,357,000 | 958,000 | |||||||||
| Reduction of values of foreclosed mortgages and loans charged off | (2,358,000 | ) | (1,863,000 | ) | (3,611,000 | ) | ||||||
| Balance, end of year | $ | 1,617,000 | $ | 2,555,000 | $ | 3,061,000 | ||||||
The following table summarizes the Company’s reserve balances as of December 31, 2014, 2013 and 2012:
| Reconciliation to Consolidated Balance Sheets : | 2014 | 2013 | 2012 | |||||||||
| Amounts included in reserves – deficiency notes | $ | 592,000 | $ | 1,736,000 | $ | 2,247,000 | ||||||
| Amounts included in real estate owned, net (1) | 920,000 | 691,000 | 500,000 | |||||||||
| Amounts included in mortgage investments – allowance for loan losses | 105,000 | 128,000 | 314,000 | |||||||||
| Balance, end of year | $ | 1,617,000 | $ | 2,555,000 | $ | 3,061,000 | ||||||
| (1) | Real estate owned is presented net of reserves in the accompanying consolidated financial statements. |
In December of 2006 the Company ceased funding interim loans for the construction of single family homes. Prior to December of 2006 the Company funded these Interim Loans through a non-related party lender, Residential Development Corp. (“RDC”). Throughout 2007 and 2008, we experienced increased delinquency and foreclosures on loans previously funded to RDC and implemented the following actions with regard to RDC:
| · | Ceased funding loans to RDC |
| · | Began aggressive liquidation of properties securing non-performing loans |
| · | Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets |
| · | Began detailed examination of RDC lending practices and collateral positions |
| · | Re-evaluated market values of properties securing the RDC loans |
| · | Began review of all recourse afforded the Company by RDC and its principal owner |
The Company continued these efforts throughout 2014 and 2013 and liquidated the remaining RDC foreclosed property portfolio in 2014. As of December 31, 2009, the remainder of the RDC Interim Loans were foreclosed and all acquired assets were reflected as real estate owned in the accompanying consolidated financial statements. As of December 31, 2014, all foreclosed RDC assets had been liquidated. As of December 31, 2014, the portion of Deficiency Notes and Reserves – Deficiency Notes, applicable to the RDC deficiency note was approximately $1,533,000 and $591,000, respectively. As of December 31, 2013, the portion of Deficiency Notes and Reserves – Deficiency Notes, applicable to the RDC deficiency note was approximately $3,251,000 and $1,736,000, respectively.
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DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of December 31, 2014, 2013, and 2012, the Company did not have any contractual obligations to make future payments under any debt obligations or long-term lease agreements.
DIVIDENDS DECLARED AND DISTRIBUTIONS MADE
During the year ended December 31, 2014, we declared dividends and made distributions on a monthly basis as shown below. We maintained a 2.9% annualized distribution rate during the year and distributed approximately 639% of our net income. Distributions paid on NAV were made at a rate of 3.91% and 3.95% for the years ended December 31, 2014 and 2013 respectively. We are under no obligation to make distributions at any particular rate, although we are obligated to distribute 90% of our REIT Taxable Income in order to continue to qualify as a REIT for federal income tax purposes. The amount distributed in excess of earnings per share represents return of capital.
| For the Years Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Dividend paid per Share | $ | 0.58 | $ | 0.58 | $ | 0.58 | ||||||
| Amount paid in excess of earnings per Share (return of capital) | $ | 0.49 | $ | 0.40 | $ | 0.35 | ||||||
OFF BALANCE SHEET ARRANGEMENTS
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to interest rate changes primarily in connection with our bank.
During August 2009, the Company entered into a new revolving line of credit facility with Texas Capital Bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest was due at maturity, which was August 2012. Effective September 2012, the line was renewed under the same terms and matures on September 5, 2015. The line is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $4,454,000 and $4,376,000, at December 31, 2014 and 2013, respectively.
On May 27, 2011, the Company entered into a new term loan credit facility with Veritex Community Bank for $4,300,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest was due at maturity which was May 27, 2014. Effective May 27, 2014 this term line of credit facility was renewed with the lender, the loan commitment was increased to $5,000,000 and principal and all unpaid interest will be due at maturity, May 27, 2017. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $3,618,000 and $1,593,000.
On October 26, 2011, the Company entered into a new term loan credit facility with Green Bank for $5,000,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest was due at maturity which on October 26, 2014. The loan was extended to January 26, 2015 and has not been renewed by the bank. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $697,000 and $546,000. The Company is pursuing refinancing this loan with another bank under the same terms.
On July 22, 2013, the Company entered into a revolving line of credit facility with Southwest Bank for $15,000,000. The loan bears interest at prime plus one percent, with a floor of 4.75%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is January 16, 2015 for $3,199,670 and May 6, 2017 for $1,837,665. The loan balance that matured on January 16, 2015 was renewed under the same terms with a new maturity date of January 16, 2018. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $5,037,000 and $1,167,000, respectively.
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On April 21, 2010, the Company entered into a new term loan credit facility with Community Trust Bank for $1,600,000. The loan bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 21, 2011. The term loan credit facility was extended, effective December 21, 2012, with an amended maturity date of December 19, 2013, and an interest rate reduction from 7.0% to 5.5%. Effective February 19, 2014, a modification extended the maturity date to February 19, 2015. Effective February 18, 2015, a modification was executed extending the maturity date to July 30, 2016. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at both December 31, 2014 and 2013 was approximately $569,000.
On January 27, 2011, the Company initiated a private offering of Secured Subordinated Notes (“Notes,” to accredited investors “Note Holders”). The Notes are being offered through a wholly - owned subsidiary, UMT Home Finance II, L.P. (“HF II”). HF II is a Delaware limited partnership that was formed on November 29, 2010 as a Special Purpose Entity, for the purpose of originating and holding loans made to fund the acquisition of finished lots and the construction of single-family homes on the subject lots (“Loans”). HF II will issue up to $5 million in 7.5% Notes. The Notes will be secured by an undivided security interest on the pool of loans owned by HF II. The offering of the Notes is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933. Periodic payments are due and payable through December 2019. As of December 31, 2014 and 2013, approximately $4,749,000, and $4,275,000, respectively.
As of December 31, 2014 and 2013, the Company had twenty-three, and ten notes payable to various unrelated parties totaling approximately $2,103,000 and $1,347,000, respectively. Periodic payments are due and payable through December 2019. These notes bear interest at the rate of 7.5% per annum and require interest only payments on a monthly basis. These notes are secured by an undivided security interest in the pool of construction loans funded for the construction of single-family homes by UMTHF a wholly owned and consolidated subsidiary of United Mortgage Trust.
Below is a Five Year Maturity Schedule of all lines of credit payable:
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||
| Lines of Credit Payable Maturity | $ | 8,351,000 | $ | - | $ | 5,455,000 | $ | - | $ | - | $ | - | $ | 13,806,000 | ||||||||||||||
Below is a Five Year Maturity Schedule of all notes payable:
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||
| Notes Payable Maturity | $ | 569,000 | $ | 300,000 | $ | 1,239,000 | $ | 4,375,000 | $ | 937,000 | $ | - | $ | 7,420,000 | ||||||||||||||
| 39 |
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNITED MORTGAGE TRUST
INDEX TO FINANCIAL STATEMENTS
| 40 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
United Mortgage Trust
We have audited the accompanying consolidated balance sheets of United Mortgage Trust as of December 31, 2014 and 2013, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and 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 United Mortgage Trust as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
/s/ Whitley Penn LLP
Dallas, Texas
March 31, 2015
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CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 984,841 | $ | 1,108,300 | ||||
| Mortgage investments: | ||||||||
| Investment in trust receivable | 536,084 | 653,736 | ||||||
| Investment in residential mortgages | 159,375 | 65,335 | ||||||
| Interim mortgages, related party | 15,830,254 | 16,282,339 | ||||||
| Allowance for loan losses | (105,462 | ) | (128,053 | ) | ||||
| Total mortgage investments, net | 16,420,251 | 16,873,357 | ||||||
| Lines of credit receivable, related parties | 90,844,122 | 86,151,485 | ||||||
| Lines of credit receivable | 15,706,986 | 8,961,704 | ||||||
| Accrued interest receivable | 4,234,105 | 1,882,012 | ||||||
| Accrued interest receivable, related parties | 13,025,687 | 10,968,042 | ||||||
| Reserves – accrued interest receivable | (5,027,174 | ) | (3,693,244 | ) | ||||
| Recourse obligations, related parties | 20,190,990 | 20,094,279 | ||||||
| Real estate owned, net | 4,439,004 | 5,287,857 | ||||||
| Deficiency notes | 3,258,330 | 4,976,199 | ||||||
| Deficiency note, related party | 28,739,855 | 29,295,567 | ||||||
| Allowance for loan losses – deficiency notes | (591,447 | ) | (1,736,306 | ) | ||||
| Other assets | 394,783 | 1,959,363 | ||||||
| Total assets | $ | 192,620,333 | $ | 182,128,615 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Dividends payable | $ | 311,000 | $ | 311,000 | ||||
| Lines of credit payable | 13,805,860 | 7,682,920 | ||||||
| Accounts payable and accrued liabilities | 616,341 | 820,321 | ||||||
| Accounts payable and accrued liabilities, related parties | 526,431 | 1,939,695 | ||||||
| Participation payable, related parties | 74,686,618 | 70,835,104 | ||||||
| Notes payable | 7,420,156 | 6,190,656 | ||||||
| Total liabilities | 97,366,406 | 87,779,696 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ Equity: | ||||||||
| Shares of beneficial interest; $.01 par value; 100,000,000 shares authorized; 8,375,363 and 8,360,463 shares issued in 2014 and 2013, respectively; and 6,431,960 and 6,436,767 shares outstanding in 2014 and 2013, respectively | 83,754 | 83,605 | ||||||
| Additional paid-in capital | 147,965,964 | 147,748,315 | ||||||
| Cumulative distributions in excess of earnings | (19,523,383 | ) | (16,411,341 | ) | ||||
| 128,526,335 | 131,420,579 | |||||||
| Less treasury stock of 1,943,403 and 1,923,695 shares of beneficial interest in 2014 and 2013, respectively, at cost | (37,359,812 | ) | (37,071,660 | ) | ||||
| Total United Mortgage Trust shareholders’ equity | 91,166,523 | 94,348,919 | ||||||
| Noncontrolling interest | 4,087,404 | - | ||||||
| Total equity | 95,253,927 | 94,348,919 | ||||||
| Total liabilities and shareholders’ equity | $ | 192,620,333 | $ | 182,128,615 | ||||
See accompanying notes to consolidated financial statements.
| 42 |
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Interest Income | ||||||||||||
| Interest on loans – related parties | $ | 3,586,314 | $ | 4,359,866 | $ | 4,479,806 | ||||||
| Interest on loans | 1,770,367 | 1,288,476 | 1,028,601 | |||||||||
| Total interest income | 5,356,681 | 5,648,342 | 5,508,407 | |||||||||
| Interest Expense: | ||||||||||||
| Long term debt – related parties | 185,028 | 129,232 | 150,952 | |||||||||
| Long term debt | 1,238,503 | 859,188 | 623,732 | |||||||||
| Total interest expense | 1,423,531 | 988,420 | 774,684 | |||||||||
| Net interest income | 3,933,150 | 4,659,922 | 4,733,723 | |||||||||
| Provision for loan losses | 1,420,474 | 1,356,919 | 957,900 | |||||||||
| Net interest income after provision for loan losses | 2,512,676 | 3,303,003 | 3,775,823 | |||||||||
| Noninterest Expense: | ||||||||||||
| Trust administration fee – related parties | 1,000,000 | 1,000,000 | 1,000,000 | |||||||||
| Loan servicing fee – related parties | 640 | 4,532 | 19,128 | |||||||||
| General and administrative – related parties | 90,662 | 76,680 | 77,735 | |||||||||
| General and administrative | 837,640 | 1,034,093 | 1,192,384 | |||||||||
| Total noninterest expense | 1,928,942 | 2,115,305 | 2,289,247 | |||||||||
| Net income | $ | 583,734 | $ | 1,187,698 | $ | 1,486,576 | ||||||
| Add back: net loss attributable to noncontrolling interest | 33,632 | - | - | |||||||||
| Net income attributable to holders of shares of beneficial interest | $ | 617,366 | $ | 1,187,698 | $ | 1,486,576 | ||||||
| Net income per share of beneficial interest | $ | 0.10 | $ | 0.18 | $ | 0.23 | ||||||
| Weighted average shares outstanding | 6,434,023 | 6,437,253 | 6,439,528 | |||||||||
| Distributions per weighted share outstanding | $ | 0.58 | $ | 0.58 | $ | 0.58 | ||||||
See accompanying notes to consolidated financial statements.
| 43 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2014, 2013 and 2011
| Shares of | Additional | Cumulative Distributions | ||||||||||||||||||||||||||||||
| Beneficial Interest | Noncontrolling | Paid-in | in Excess of | Treasury | Treasury | |||||||||||||||||||||||||||
| Shares | Par Value | Interest | Capital | Earnings | Shares | Stock | Total | |||||||||||||||||||||||||
| Balance at December 31, 2011 | 8,324,756 | $ | 83,227 | $ | - | $ | 147,208,206 | $ | (11,620,748 | ) | 1,887,336 | $ | (36,567,698 | ) | $ | 99,102,987 | ||||||||||||||||
| Proceeds from shares issued | 20,625 | 227 | - | 315,777 | - | - | - | 316,004 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 18,514 | (227,262 | ) | (227,262 | ) | ||||||||||||||||||||||
| Dividends ($0.58 per share) | - | - | - | - | (3,733,422 | ) | - | - | (3,733,422 | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | 1,486,576 | - | - | 1,486,576 | ||||||||||||||||||||||||
| Balance at December 31, 2012 | 8,345,381 | $ | 83,454 | $ | - | $ | 147,523,983 | $ | (13,867,594 | ) | 1,905,850 | $ | (36,794,960 | ) | $ | 96,944,883 | ||||||||||||||||
| Proceeds from shares issued | 15,082 | 151 | - | 224,332 | - | - | - | 224,483 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 17,845 | (276,700 | ) | (276,700 | ) | ||||||||||||||||||||||
| Dividends ($0.58 per share) | - | - | - | - | (3,731,445 | ) | - | - | (3,731,445 | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | 1,187,698 | - | - | 1,187,698 | ||||||||||||||||||||||||
| Balance at December 31, 2013 | 8,360,463 | $ | 83,605 | $ | - | $ | 147,748,315 | $ | (16,411,341 | ) | 1,923,695 | $ | (37,071,660 | ) | $ | 94,348,919 | ||||||||||||||||
| Proceeds from shares issued | 14,900 | 149 | - | 217,649 | - | - | - | 217,798 | ||||||||||||||||||||||||
| Proceeds from noncontrolling interest | - | - | 4,194,000 | - | - | - | - | 4,194,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 19,708 | (288,152 | ) | (288,152 | ) | ||||||||||||||||||||||
| Dividends ($0.58 per share) | - | - | - | (3,729,408 | ) | - | - | (3,729,408 | ) | |||||||||||||||||||||||
| Distributions to noncontrolling interest | (72,964 | ) | (72,964 | ) | ||||||||||||||||||||||||||||
| Net income (loss) | - | - | (33,632 | ) | - | 617,366 | - | - | 583,734 | |||||||||||||||||||||||
| Balance at December 31, 2014 | 8,375,363 | $ | 83,754 | $ | 4,087,404 | $ | 147,965,964 | $ | (19,523,383 | ) | 1,943,403 | $ | (37,359,812 | ) | $ | 95,253,927 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
| 44 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Operating Activities | ||||||||||||
| Net income | $ | 583,734 | $ | 1,187,698 | $ | 1,486,576 | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Provision for loan losses | 1,420,474 | 1,356,919 | 957,900 | |||||||||
| Depreciation and amortization | 16,500 | 16,200 | 21,253 | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| Accrued interest receivable | (2,110,512 | ) | (159,364 | ) | 194,664 | |||||||
| Accrued interest receivable, related parties | (2,832,383 | ) | (2,398,858 | ) | (2,146,213 | ) | ||||||
| Other assets | 1,494,413 | (509,300 | ) | 119,905 | ||||||||
| Accounts payable and accrued liabilities | (200,970 | ) | 47,377 | (162,337 | ) | |||||||
| Accounts payable and accrued liabilities, related parties | (1,116,407 | ) | 485,695 | 208,205 | ||||||||
| Net cash provided by (used in) operating activities | (2,745,151 | ) | 26,367 | 679,953 | ||||||||
| Investing Activities | ||||||||||||
| Principal receipts on trust receivable | 117,652 | 104,292 | 193,138 | |||||||||
| Investment in residential mortgages | - | - | (272,687 | ) | ||||||||
| Principal receipts on residential mortgages | 63,414 | 2,394,293 | 585,874 | |||||||||
| Investment in interim mortgages and deficiency notes | - | - | - | |||||||||
| Principal receipts on interim mortgages and deficiency notes | 1,826 | - | - | |||||||||
| Investments in interim mortgages and deficiency notes, related parties | - | - | - | |||||||||
| Principal receipts on interim mortgages and deficiency notes, related parties | 670,828 | 2,135,347 | 1,374,165 | |||||||||
| Investments in recourse obligations, related parties | (2,159 | ) | (269 | ) | (694 | ) | ||||||
| Principal receipts from recourse obligations, related parties | 500 | 308,087 | 50,432 | |||||||||
| Principal investments in lines of credit receivable, related parties | - | (15,000 | ) | (571,870 | ) | |||||||
| Principal receipts from lines of credit receivable | 24,468,037 | 26,032,028 | 20,821,172 | |||||||||
| Principal investments in lines of credit receivable | (30,512,923 | ) | (30,249,054 | ) | (21,433,213 | ) | ||||||
| Investments in real estate owned | - | (79,649 | ) | (177,268 | ) | |||||||
| Principal receipts on real estate owned | 140,803 | 779,152 | 1,031,598 | |||||||||
| Net cash (used in) provided by investing activities | (5,052,022 | ) | 1,409,227 | 1,600,647 | ||||||||
| Financing Activities | ||||||||||||
| Proceeds from lines of credit payable | 8,464,220 | 4,371,415 | 3,677,037 | |||||||||
| Principal payments on lines of credit payable | (2,341,280 | ) | (3,676,792 | ) | (3,369,072 | ) | ||||||
| Proceeds from notes payable | 2,157,000 | 4,870,164 | 1,727,000 | |||||||||
| Principal payments on notes payable | (927,500 | ) | (2,344,632 | ) | (798,233 | ) | ||||||
| Proceeds from issuance of shares of beneficial interest | 217,798 | 224,483 | 316,004 | |||||||||
| Purchase of treasury stock | (288,152 | ) | (276,700 | ) | (227,262 | ) | ||||||
| Dividends | (3,729,408 | ) | (3,731,445 | ) | (3,733,422 | ) | ||||||
| Distributions to noncontrolling interest | (72,964 | ) | - | - | ||||||||
| Proceeds from noncontrolling interest preferred equity units | 4,194,000 | - | - | |||||||||
| Net cash provided by (used in) financing activities | 7,673,714 | (563,507 | ) | (2,407,948 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | (123,459 | ) | 872,087 | (127,348 | ) | |||||||
| Cash and cash equivalents at beginning of year | 1,108,300 | 236,213 | 363,561 | |||||||||
| Cash and cash equivalents at end of year | $ | 984,841 | $ | 1,108,300 | $ | 236,213 | ||||||
See accompanying notes to consolidated financial statements.
| 45 |
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||||||
| Cash paid for interest | $ | 1,060,871 | $ | 699,758 | $ | 540,623 | ||||||
| Non-Cash Financing and Investing Activity | ||||||||||||
| Transfers of loans to foreclosed properties or recourse obligations | $ | - | $ | 344,587 | $ | 150,926 | ||||||
| (Increase) decrease participation receivable, related parties | $ | (3,851,514 | ) | $ | (3,864,195 | ) | $ | (9,195,637 | ) | |||
| (Decrease) increase participation payable, related parties | $ | 3,851,514 | $ | 3,864,195 | $ | 9,195,637 | ||||||
| (Increase) decrease participation accrued interest receivable, related parties | $ | (997,253 | ) | $ | (1,600,856 | ) | $ | (324,492 | ) | |||
| Increase (decrease) participation accrued interest payable, related parties | $ | 997,253 | $ | 1,600,856 | $ | 324,492 | ||||||
| (Increase) decrease in lines of credit, related parties | $ | (841,123 | ) | $ | (1,053,319 | ) | $ | (823,072 | ) | |||
| (Increase) decrease in accrued interest receivable, related parties | $ | 812,412 | $ | 1,137,051 | $ | 986,889 | ||||||
| (Increase) decrease interim mortgages and deficiency notes, related parties | $ | (336,969 | ) | $ | (1,468,865 | ) | $ | (978,997 | ) | |||
| (Increase) decrease recourse notes, related parties | $ | 95,052 | $ | - | $ | - | ||||||
| (Increase) decrease interim mortgages and deficiency notes | $ | 426,807 | $ | (1,902,268 | ) | $ | (1,964,526 | ) | ||||
| Increase (decrease) in real estate owned | $ | (156,179 | ) | $ | 2,942,814 | $ | 2,779,706 | |||||
| (Increase) decrease in other assets | $ | - | $ | (1,161,836 | ) | $ | - | |||||
| Increase (decrease)in lines of credit payable | $ | - | $ | 1,161,836 | $ | - | ||||||
| (Increase) decrease lines of credit receivable | $ | 700,396 | $ | - | $ | - | ||||||
| Increase (decrease) Accrued interest payable, related parties | $ | (700,396 | ) | $ | - | $ | - | |||||
See accompanying notes to consolidated financial statements.
| 46 |
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
A. NATURE OF BUSINESS
THE COMPANY
United Mortgage Trust (the “Company”) is a Maryland real estate investment trust that qualifies as a real estate investment trust (a “REIT”) under federal income tax laws. The Company wholly owns, has a controlling financial interest or both in UMT Home Finance, L.P. (“UMT HF”) UMT Home Finance II, L.P. (“HF II”), UMT Home Finance III, L.P. (“HF III”) and UMT United Residential Home Finance L.P. (“URHF”). All four entities are Delaware limited partnerships. The Company owns 100% of UMT LT Trust, a Maryland real estate investment trust, and the Company owns a 99.99% limited partnership interest in UMT Properties, L.P. and UMT 15th Street, L.P., both of which are Delaware limited partnerships.
In the past, the Company has invested in first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans” and first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages, some of which are still outstanding. Currently, our principal investment objectives are to invest proceeds from our financing proceeds, proceeds from the repayment of our loans, capital transaction proceeds and retained earnings in the following types of investments: (i) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (ii) lines of credit and loans secured by developed single-family lots, referred to as “Finished Lot Loans”; (iii) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (iv) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”; )”; (v) to provide credit enhancements to real estate developers, homebuilders, land bankers and other real estate investors who acquire real property, subdivide real property into single-family residential lots, acquire finished lots and/or build homes on such lots referred to as “Credit Enhancements”; (vi) discounted cash flows secured by assessments levied on real property; and (vii) senior or subordinate securities backed by finished lot loans and/or development loans referred to as “Securitizations”. The Company collectively refers to the above listed loans as “Mortgage Investments”. Additionally, the Company’s portfolio includes obligations of related parties of our Advisor, which we refer to as “Recourse Obligations.”
The Company has no direct employees. The services of our President and Chief Financial Officer, Mr. Ducote, are retained through a consulting agreement. The Company pays a monthly trust administration fee to UMTH General Services, L.P. (“UMTHGS” or “Advisor”), a subsidiary of UMT Holdings, L.P. (“UMTH”), a Delaware limited partnership and related party, for the services relating to its daily operations. The Company’s offices are located in Grapevine, Texas.
THE ADVISOR
The Company uses the services of UMTHGS to manage its day-to-day operations and to recommend investments for purchases. The Company’s President is Stuart Ducote. Other UMTH partners and officers include David A. Hanson, who is President of UMTHGS and secretary of UMTH and its subsidiaries. Todd Etter is a shareholder, director and Chairman of the Board of UMT Services, Inc., UMTH’s general partner and, a Director of United Development Funding, Inc. (“UDF”), the general partner of UDF. Mr. Etter is also the sole owner of South Central Mortgage, Inc. ("SCMI"), a Texas corporation that sold Mortgage Investments to the Company. In addition, he is a director and shareholder of Capital Reserve Group, Inc., a Texas corporation, (“CRG”), in addition SCMI owns 50% of Ready America Funding Corp. (“RAFC”). Both CRG and RAFC are Texas corporations that use funds borrowed from the Company to make loans to other borrowers and assign such loans to the Company as security for CRG and RAFC obligations to the Company. Hollis Greenlaw is a shareholder, director and President and Chief Executive Officer of UMT Services, Inc., a partner and the President and Chief Executive Officer of UMTH, and a director and the President and Chief Executive Officer of United Development Funding, Inc., the general partner of UDF, with whom the Company has extended a line of credit. He is Chief Executive Officer of UMTH Land Development, L.P., the general partner of United Development Funding III, L.P. (“UDF III”). Craig Pettit is a partner of UMTH, and is the sole proprietor of two companies that own 50% of RAFC. He currently functions as the President of RAFC. William Lowe is a partner of UMTH and owns 50% of CRG. Michael K Wilson is a partner of UMTH and a director of UMT Services, Inc. Cara Obert is a partner of UMTH. She also serves as Chief Financial Officer and Treasurer of UMT Services, Inc. and UMTH Land Development, L.P. Besides the subsidiaries above-referenced, UMTH is the parent company of UMTHLC that sells interim loans to the Company, REO Property Company, L.P., (“REOPC”), a Delaware limited partnership that has provided services to the Company, and of Prospect Service Corp. (“PSC”), a Texas corporation that services the Company’s residential mortgages and contracts for deed.
| 47 |
ADVISORY AGREEMENT
UMTHGS is responsible for the day-to-day operations of the Company and for seeking out, underwriting and presenting Mortgage Investments to the Company for consideration and purchase, under the guidance of the Company’s Trustees. In that regard, it employs the requisite number of staff to accomplish these tasks, leases its own office space and pays its own overhead. The Company pays a trust administration fee for services rendered by the Advisor.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows:
BASIS OF ACCOUNTING
The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries: UMT HF, UMT HF II, UMT HF III, UMT URHF, UMT LT Trust, UMT Properties, LP and UMT 15th Street, LP. All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
RESIDENTIAL MORTGAGES, CONTRACTS FOR DEED AND INTERIM LOANS
Residential mortgages, contracts for deed and interim loans are recorded at the lower of cost or estimated net realizable value, net of discounts and loan acquisition costs paid to the Advisor. The Mortgage Investments are collateralized by real property owned by the borrowers.
The majority of residential mortgages and contracts for deed are 360 month real estate lien notes that are purchased by the Company from several sources, including SCMI, a related party of the Advisor. Interim loans are real estate lien notes purchased by the Company from various sources including related parties of the Advisor. Interim loans have terms of 12 months or less. The Company is not a loan originator nor does it purchase Mortgage Investments for resale. The Company intends to hold Mortgage Investments to maturity.
Generally, the Company does not retain servicing rights on its Mortgage Investments. The Company relies on various servicing sources, including related party companies, to service its Mortgage Investments.
INTEREST INCOME ACCRUAL
The Company’s portfolio of residential mortgages, contracts for deed, interim loans and lines of credit produce monthly interest income; however, the Company may not receive interest income on a particular loan if a borrower fails to make its monthly interest payment.
The Company has two types of loans and its accrual method differs for them: Nonrecourse Loans and Recourse Loans.
A Nonrecourse Loan is one that is not currently covered under a recourse agreement. The majority of the Company’s Nonrecourse Loans are residential mortgages and contracts for deed.
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A Recourse Loan is one that is covered under a recourse agreement that obligates either a third party guaranteeing the performance of a loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan to the Company if the underlying borrower defaults. The majority of the Company’s Recourse Loans are interim loans made to borrowers that make corresponding loans which are pledged to the Company as security for the borrower's obligations to the Company. All loans that the Company makes to related parties of its Advisor are Recourse Loans.
There is no assurance that the interest income accrued by the Company will be paid by a borrower. When income is accrued with respect to a foreclosed loan, the Company sells the mortgaged property and receives proceeds from the sale. The Company first applies the proceeds to any accrued interest related to the loan and then applies the balance of the proceeds to the outstanding loan balance. If the proceeds from the sale of the property are not sufficient to reduce the outstanding loan balance to zero, the remaining balance is referred to as the “charge-off amount.” The charge-off amount is recorded against the mortgage investment loss reserve: accrued interest income, plus the outstanding loan balance, less proceeds from the sale of the property equals the amount charged-off against loss reserves.
With respect to Nonrecourse Loans, the Company will accrue interest, if based on the underlying borrower’s payment history and based on analysis by the loan servicing staff, when applicable, it is determined that the likelihood of an interest payment being made is probable. The Company will cease accruing interest when the likelihood that an interest payment will be made is less than probable, generally if a payment is more than 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful based on a review of economic conditions, the estimated value of the underlying collateral and other relevant factors. If and when the loan is foreclosed, the Company no longer considers the property to be income producing and reclassifies it as foreclosed. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Any payments received on loans classified as non-accrual status are typically applied first to outstanding loan amounts and then to the recovery of lost interest.
With respect to Recourse Loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable, provide management believes it is probable that the originating company will make an interest payment. Interest on Recourse Loans continues to accrue until the loan is fully paid off.
Deficiency Notes originate from the foreclosure of a Recourse Loan and subsequent sale of the collateral which results in proceeds that are insufficient to discharge the outstanding balance, in which case the originating company delivers to the Company an unsecured deficiency note in the amount of the deficiency.
In July 2010, the Company began reserving for the interest income earned on certain receivables with the intent to recognize this interest income on a cash basis once payments resumed. Payments resumed in 2012 and a total of approximately $124,000, $649,000 and $812,000 of interest payments were received and recognized in 2014, 2013 and 2012, respectively. Reserves for accrued interest receivable were approximately $5,027,000 and $3,693,000 at December 31, 2014 and 2013, respectively.
LOAN LOSS RESERVES
Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. The Company’s three year historical default rate for residential mortgages and contracts for deed is approximately 0.54% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for interim mortgages is approximately 0.0%. The Company charges additions to the loan loss reserves to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against, or “charged-off and decrease the loan loss reserves, while amounts recovered on previously charged off accounts increase the reserve.
The changes in the reserve for loan losses during the years ended December 31, 2014, 2013, and 2012 are summarized as follows:
| Walk forward of Loan Loss Reserves: | 2014 | 2013 | 2012 | |||||||||
| Balance, beginning of year | $ | 2,555,000 | $ | 3,061,000 | $ | 5,714,000 | ||||||
| Provision for loan losses | 1,420,000 | 1,357,000 | 958,000 | |||||||||
| Reduction of values of foreclosed mortgages and loans charged off | (2,358,000 | ) | (1,863,000 | ) | (3,611,000 | ) | ||||||
| Balance, end of year | $ | 1,617,000 | $ | 2,555,000 | $ | 3,061,000 | ||||||
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The following table summarizes the Company’s reserve balances as of December 31, 2014, 2013 and 2012:
| Reconciliation to Consolidated Balance Sheets : | 2014 | 2013 | 2012 | |||||||||
| Amounts included in reserves – deficiency notes | $ | 592,000 | $ | 1,736,000 | $ | 2,247,000 | ||||||
| Amounts included in real estate owned, net (1) | 920,000 | 691,000 | 500,000 | |||||||||
| Amounts included in mortgage investments – allowance for loan losses | 105,000 | 128,000 | 314,000 | |||||||||
| Balance, end of year | $ | 1,617,000 | $ | 2,555,000 | $ | 3,061,000 | ||||||
(1) Real estate owned is presented net of reserves in the accompanying consolidated financial statements.
In December of 2006 the Company ceased funding Interim Loans for the construction of single family homes (“Construction Loans”). Prior to December of 2006 the Company funded these Interim Loans through a non-related party lender, Residential Development Corp. (“RDC”). Throughout 2007 and 2008, we experienced increased delinquency and foreclosures on loans previously funded to RDC and implemented the following actions with regard to RDC:
| · | Ceased funding loans to RDC |
| · | Began aggressive liquidation of properties securing non-performing loans |
| · | Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets |
| · | Began detailed examination of RDC lending practices and collateral positions |
| · | Re-evaluated market values of properties securing the RDC loans |
| · | Began review of all recourse afforded the Company by RDC and its principal owner |
The Company continued these efforts throughout 2014 and 2013 and the RDC foreclosed property portfolio was fully liquidated during 2014. As of December 31, 2009, the remainder of the RDC Interim Loans were foreclosed and all acquired assets were reflected as real estate owned in the accompanying consolidated financial statements. As of December 31, 2013, all foreclosed RDC assets had been liquidated. As of December 31, 2014, the portion of Deficiency Notes and Reserves – Deficiency Notes, applicable to the RDC deficiency note was approximately $1,533,000 and $591,000, respectively. As of December 31, 2013, the portion of Deficiency Notes and Reserves – Deficiency Notes, applicable to the RDC deficiency note was approximately $3,251,000 and $1,736,000, respectively.
ACCOUNTING FOR AND DISPOSITION OF FORECLOSED PROPERTIES
The Company follows the accounting and reporting standards for foreclosed real estate as set forth in the Financial Accounting Standards Board Accounting Standards Codification (”ASC”) Topic 310-40, Accounting for Troubled Debt Restructurings by Creditors, and ASC Topic 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. When the Company takes possession of real estate through foreclosure it is classified as Real Estate Owned (“REO”) at the lower of the fair market value of the asset, less estimated selling costs, or the cost basis of the asset. For assets that are not subject to a recourse agreement, any excess of the cost basis of the asset over the fair value of the asset less the estimated selling costs of the asset is recognized as a loss, to the extent it is not offset against existing allowances for uncollectible amounts or other valuation allowances, at the time of foreclosure. Additional direct costs incurred during foreclosure such as legal fees are included in expense when incurred. For loans that are subject to a recourse obligation, any excess of the cost basis of the asset over the fair value of the asset minus the estimated selling costs of the asset is added to the obligor’s recourse obligation. The Company attempts to resell the property to recover all costs associated with the default, including legal fees, transaction costs, and repair expenses. Upon sale of the property, a gain or loss is recognized. If a foreclosed loan is subject to a recourse agreement with a non-related party borrower and is not fully repaid, the borrower delivers a new promissory note to the Company in the amount of the deficiency. These promissory notes are paid in installments.
The Company receives nominal rental revenue from certain foreclosed properties. As these revenues are immaterial relative to the Company’s total revenues and gross REO expenses and such revenues are ancillary to the Company’s core business, any revenues generated by REO properties held for sale are reflected as a contra expense and offset a portion of the expenses incurred to maintain the foreclosed properties.
In accordance with the reporting requirements of ASC Topic 310, Accounting for Troubled Debt Restructurings by Creditors, and ASC Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets, foreclosed property received in full or partial satisfaction of a loan is recorded at the lower of the fair market value of the property at the time of foreclosure, less the selling costs or the cost basis of the property. For loans that are not subject to a recourse agreement, any excess of the recorded investment in the foreclosed loan over the fair value of the asset is recognized as a loss, to the extent it is not offset against existing allowances for uncollectible amounts or other valuation allowances, at the time of foreclosure. Additional direct costs incurred during foreclosure such as legal fees are included in expense when incurred. For assets covered by a recourse obligation, the obligor delivers a new promissory note to the Company in the amount of the deficiency. These promissory notes are paid in installments. The foreclosed property portfolio is reviewed quarterly and any additional costs or other losses associated with maintaining a foreclosed property are recognized when they become known and estimable. Upon sale of a foreclosed property, any additional losses realized are recognized immediately. Any gains realized upon the sale of a foreclosed property are deferred until such time as the Company’s economic earning process is completed for that property.
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INCOME TAXES
The Company intends to continue to qualify as a REIT under the Internal Revenue Code of 1986 the (“Code”) as amended. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) that is distributed to its shareholders provided that at least 90% of Taxable Income is distributed. No provision for taxes has been made in the consolidated financial statements, as the Company believes it is in compliance with the requirements in the Code for the treatment as a REIT. The dividend (earnings) portions of distributions paid to shareholders are considered ordinary income for income tax purposes.
ASC 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In accordance with ASC 740, we must determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. We believe we have no such uncertain positions.
We file income tax returns in the United States federal jurisdiction. At December 31, 2014, tax returns related to fiscal years ended December 31, 2011 through December 31, 2013 remain open to possible examination by the tax authorities. No tax returns are currently under examination by any tax authorities. The Company did not incur any penalties or interest during the years ended December 31, 2014 and 2013.
EARNINGS PER SHARE
ASC 260, Earnings per Share, provides for the calculation of basic and diluted earnings per share. Basic earnings per share include no dilution and are computed by dividing income available to shareholders by the weighted average number of shares outstanding for the period. Dilutive earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Because the Company’s potential dilutive securities are not dilutive, the accompanying presentation is only of basic earnings per share.
DISTRIBUTION POLICY AND DISTRIBUTIONS DECLARED
The Company makes distributions each year (not including return of capital for federal income tax purposes) equal to at least 90% of the REIT’s Taxable Income. Since September 1997 the Company has made monthly distributions to its shareholders and intends to continue doing so. The trustees declare the distribution rate quarterly and distributions are made at the rate declared at the end of the following month for shareholders of record as of the 15th day of the preceding month. The Company distributed 639% 314%, and 251% of earnings during 2014, 2013, and 2012, respectively, and made distributions in excess of earnings of 539%, 214%, and 151% during 2014, 2013, and 2012, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the reporting requirements of ASC 825, Disclosures About Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities that qualify as financial instruments under this statement and includes additional information in notes to the Company’s consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of accrued interest receivable, accrued interest receivable from related parties, accounts payable and accrued liabilities (including related parties) approximate the carrying value due to the relatively short maturity of these instruments. The carrying value of residential mortgages, interim mortgages (including related parties), lines of credit receivable (including related parties), recourse obligations from related parties, Deficiency Notes (including related parties) and lines of credit payable also approximate fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.
RECOGNITION OF REVENUE
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP.
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The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.
C. DEFICIENCY NOTES – RELATED PARTY AND NON-RELATED PARTY
The Company has made loans in the normal course of business to related parties and non-related parties, the proceeds from which have been used to originate underlying loans that are pledged to the Company as security for such obligations. When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full. If the borrower or the Company foreclosed on property securing an underlying loan, or if the Company foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.
As of December 31, 2014, the Company had two deficiency notes with non-related parties in the aggregate amount of approximately $3,258,000. One note in the amount of approximately $1,725,000 bears interest at a rate of 14% per annum. The second note in the amount of approximately $1,533,000 has a reserve of approximately $591,000. The Company does not accrue interest on the second note as the underlying collateral value approximates the note balance, net of reserves.
As of December 31, 2013, the Company had two deficiency notes with non-related parties in the aggregate amount of approximately $4,976,000. One note in the amount of approximately $1,725,000 bears interest at a rate of 14% per annum. The second note in the amount of approximately $3,251,000 has a reserve of approximately $1,736,000. The Company does not accrue interest on the second note as the underlying collateral value approximates the note balance, net of reserves.
As of December 31, 2007, UMTHLC issued to the Company a variable amount promissory note in the amount of $5,100,000 to evidence its deficiency obligations to the Company. The initial principal amount of the note was approximately $1,848,000. The principal balance as of December 31, 2014 and 2013 was approximately $28,740,000 and $29,296,000, respectively. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the related party. Effective January 2011, the deficiency note was modified and the interest rate was reduced from 10% to 6%. Management has accounted for this loan modification as a modification in the normal course of business and not as a troubled debt restructuring as the borrowers and guarantors have obtained third party financing at current market rates, the modified rate represents a premium over current market rates, the risk characteristics of the third party debt obtained is similar to the modified debt, the loan’s original contractual maturity or expected duration was not extended and the Company expects to receive full payment under the loan. The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its Advisory Agreement with the Company.
On a quarterly basis, the Company conducts a review of the underlying borrowers and third party guarantors in order to assess their ability to perform their obligations under the terms of the Deficiency Notes based on updated five year forecasts of future cash flows of the underlying borrowers and guarantors. Such ability to perform is principally dependent upon the borrower’s and obligor’s ability to realize cash flows from distributions derived from the pledged collateral sufficient to meet its current operational needs, as well as provide liquidity to fund the debt service requirements under the Company’s notes. Such review includes, but is not limited to the following related to the guarantor: analyzing current financial statements and operating results, analyzing projected future operating results and validating the assumptions used to generate such projections, forecasting future cash flows and assessing the adequacy of these cash flows to service the Company’s notes, conducting discussions with and obtaining representations from the guarantors’ management with respect to their current and projected operating results. Based on such reviews, the Company has concluded that the guarantor has the ability to perform under their repayment obligations and that the deficiency note balance is fully realizable over their terms. Accordingly, the Company has not recorded any reserves on the principal portion of these loans.
See Note N Subsequent Events for additional information regarding the related party Deficiency Note.
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D. LINES OF CREDIT PAYABLE
UMT HF TCB LOC
During August 2009, the Company entered into a revolving line of credit facility with Texas Capital Bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest were due at maturity, which was August 2012. Effective September 2012, the line was renewed under the same terms and matures on September 5, 2015. The line is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $4,454,000 and $4,377,000 at December 31, 2014 and 2013, respectively. This credit facility contains financial covenants that require UMT HF to maintain a leverage ratio, tangible net worth and net income within certain bounds as proscribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
UMT HF III Veritex Community Bank LOC
On May 27, 2011, the Company entered into a revolving line of credit facility with Veritex Community Bank for $4,300,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which was May 27, 2014. Effective May 27, 2014 this term line of credit facility was renewed with the lender, the loan commitment was increased to $5,000,000 and principal and all unpaid interest will be due at maturity, May 27, 2017. All other terms remain the same. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $3,618,000 and $1,593,000, respectively. This credit facility contains a financial covenant that requires UMTHF III to maintain a leverage ratio within certain bounds as prescribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
UMT HF II Green Bank LOC
On October 26, 2011, the Company entered into a revolving line of credit facility with Green Bank for $5,000,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest was due at maturity on October 26, 2014. The loan was extended to January 26, 2015 and has not been renewed by the bank. The Company is pursuing refinancing this loan with another bank under the same terms. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $697,000 and $546,000, respectively. This credit facility contains financial covenants that require HF II to maintain a leverage ratio, tangible net worth and total liabilities to tangible net worth within certain bounds as proscribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
URHF SWB LOC
On July 22, 2013, the Company entered into a revolving line of credit facility with Southwest Bank for $15,000,000. The loan bears interest at prime plus one percent, with a floor of 4.75%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is January 16, 2015 for $3,199,670 and May 6, 2017 for $1,837,665. The loan balance that matured on January 16, 2015 was renewed under the same terms with a new maturity date of January 16, 2018. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2014 and 2013 was approximately $5,037,000 and $1,167,000, respectively. This credit facility contains financial covenants that require URHF to maintain an interest coverage ratio, tangible net worth and leverage ratio within certain bounds as proscribed in the loan agreement. There are no financial covenants related to this credit facility that may restrict the Company’s ability to obtain future financing. As of December 31, 2014, the Company was in compliance with all of its debt covenants.
Below is a Five Year Maturity Schedule of all notes payable:
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||
| Lines of Credit Payable Maturity | $ | 8,351,000 | $ | - | $ | 5,455,000 | $ | - | $ | - | $ | - | $ | 13,806,000 | ||||||||||||||
E. NOTES PAYABLE
UMT 15th Street, L.P. CTB Loan
On April 21, 2010, the Company entered into a term loan credit facility with Community Trust Bank for $1,600,000. The note payable bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest were due at maturity which was October 21, 2012. The term loan credit facility was extended effective December 21, 2012 with an amended maturity date of December 19, 2013, and an interest rate reduction from 7.0% to 5.5%. Effective February 19, 2014, a modification extended the maturity date to February 19, 2015. Effective February 18, 2015, a modification was executed extending the maturity date to July 30, 2016. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at both December 31, 2014 and 2013 was approximately $569,000.
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UMT HF II Notes Payable
On January 27, 2011, the Company initiated a private offering of Secured Subordinated Notes (“Notes,” to accredited investors “Note Holders”). The Notes are being offered through a wholly - owned subsidiary, UMT Home Finance II, L.P. (“HF II”). HF II is a Delaware limited partnership that was formed on November 29, 2010 as a Special Purpose Entity, for the purpose of originating and holding loans made to fund the acquisition of finished lots and the construction of single-family homes on the subject lots (“Loans”). HF II will issue up to $5 million in 7.5% Notes. The Notes will be secured by an undivided security interest on the pool of loans owned by HF II. The offering of the Notes is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933. Periodic payments are due and payable through December 2019. As of December 31, 2014 and 2013, approximately $4,749,000 and $4,275,000, respectively, was outstanding.
UMT HF Notes Payable
As of December 31, 2014 and 2013, the Company had twenty-three and ten notes payable to various unrelated parties totaling approximately $2,103,000 and $1,347,000, respectively. Periodic payments are due and payable through December 2019. These notes bear interest at the rate of 7.5% per annum and require interest only payments on a monthly basis. These notes are secured by an undivided security interest in the pool of construction loans funded for the construction of single-family homes by UMTHF a wholly - owned and consolidated subsidiary of United Mortgage Trust.
Below is a Five Year Maturity Schedule of all notes payable:
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||
| Notes Payable Maturity | $ | 569,000 | $ | 300,000 | $ | 1,239,000 | $ | 4,375,000 | $ | 937,000 | $ | - | $ | 7,420,000 | ||||||||||||||
F. URHF PREFERRED EQUITY OFFERING
On February 24, 2014, the Company initiated a private offering of Preferred Limited Partner Equity Units (“Preferred Equity Units”) to accredited investors (“Preferred Equity Unit Holders”). The Preferred Equity Units to Preferred Equity Unit Holders are being offered by URHF. URHF is a Delaware limited partnership formed for the purpose of investing in loans made to fund the acquisition of land and development of single family lots, loans for the acquisition of finished lots, loans secured by model homes and loans for the construction of new homes (“Loans”). URHF will issue up to $15.5 million in 5.5% Preferred Limited Partner Equity Units to Preferred Equity Unit Holders who will become Limited Partners in URHF. Each Preferred Equity Unit represents a 0.3225% ownership interest in the Partnership based upon a total of three hundred ten (310) Preferred Units. Preferred Equity Unit ownership interest does not include a General Partner Interest or a Limited Partner Interest owned by the Original Limited Partner, United Mortgage Trust. The offering of the Preferred Equity Units is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. As of December 31, 2014, 84 Preferred Units have been sold for $4,194,000. The Preferred Equity Units are reflected as Noncontrolling Interest on the consolidated financial statements.
G. OPTIONS TO PURCHASE SHARES OF BENEFICIAL INTEREST
For each year in which an Independent Trustee of the Company serves, the Trustee receives 5-year options, which vest upon grant, to purchase 2,500 shares of Company stock at $20 per share.
Following is a summary of the option transactions:
| 2014 | 2013 | 2012 | ||||||||||
| Outstanding at beginning of year | 62,500 | 60,000 | 55,000 | |||||||||
| Granted | 12,500 | 12,500 | 12,500 | |||||||||
| Expired | (12,500 | ) | (10,000 | ) | (7,500 | ) | ||||||
| Exercised | - | - | - | |||||||||
| Outstanding at end of year | 62,500 | 62,500 | 60,000 | |||||||||
| Exercisable at end of year | 62,500 | 62,500 | 60,000 | |||||||||
| Exercise price per share | $ | 20 | $ | 20 | $ | 20 | ||||||
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H. RELATED PARTY TRANSACTIONS
Related Party Receivables
As a component of its real estate investment activities the Company has since inception in 1997 regularly made Mortgage Investments in the form of loans to related parties, which were secured by loans originated by related parties to non-related parties third parties. In addition, the Company has purchased loans originated by related parties to non-related parties third parties.
Affiliates Relationships
The following chart depicts the related parties with which we have loan or recourse relationships:
The related party relationships depicted above are more fully described below:
| · | UMT Holdings, L.P. (“UMTH”) is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in: |
| o | UMTH Lending Company, LP (“UMTHLC”)which made interim mortgage loans to nonrelated third parties; |
| o | UMTH General Services, L.P. (“UMTHGS”) which serves as Advisor to the Company and; |
| o | UMTH Land Development, L.P. (“UMTHLD”) which serves as asset manager to United Development Funding, L.P. (“UDF”). |
| · | UMTHLC is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC secured by interim mortgage loans for the acquisition and renovation of single-family homes made by UMTHLC to nonrelated third parties borrowers. |
| · | UMTH Land Development, L.P., (“UMTHLD”), is a Delaware limited partnership and subsidiary of UMTH which serves as asset manager for and holds a 50% profit interest in United Development Funding, L.P. (“UDF”), a Delaware limited partnership. UMTHLD also serves as general partner of United Development Funding III, L.P. (“UDF III”). |
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| · | United Development Funding, L.P. (“UDF”), a Delaware limited partnership which originates loans and makes investments for the acquisition and development of parcels of real property as single-family residential lots. UMTHLD serves as the asset manager of UDF. The Company has extended a revolving line of credit facility to UDF which is secured by all of UDF’s senior and subordinate real estate secured loans and equity investments. |
| · | United Development Funding III, L.P., a Delaware limited partnership, (“UDF III”). UMTHLD serves as general partner of UDF III. UDF III has purchased an economic participation in a revolving credit facility we have provided to UDF. |
| · | Capital Reserve Group (“CRG”) is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which holds a 99.9% interest in UMTHGS, our advisor. The Company has loaned money to CRG secured by interim mortgage loans for the acquisition and renovation of single-family homes made by CRG to non-related third parties borrowers. |
| · | Ready America Funding Corp. (“RAFC”) is a Texas corporation that is 50% owned by South Central Mortgage, Incorporated (“SCMI”), a company owned by Todd Etter and 50% beneficially owned by Craig Pettit, a partner in UMTH. The Company has loaned money to RAFC secured by interim mortgage loans secured by land and modular and manufactured single-family homes placed on the land made by RAFC to non-related third party borrowers. |
| · | SCMI, a Texas corporation. The Company has purchased long term owner-occupied residential mortgage loans from SCMI secured by single-family homes. |
| · | Wonder Funding, LP (“Wonder”) is a Delaware limited partnership that is owned by Ready Mortgage Corporation (“RMC”). RMC is beneficially owned by Craig Pettit, a partner of UMTH. The Company has loaned money to Wonder secured by interim mortgage loans for the acquisition and renovation of single-family homes made by Wonder to non-related third parties borrowers. |
The following table details the governance and ownership aspects of above related party relationships:
| United Mortgage Trust Related Party Relationships | ||||||
| Company | Affiliation | Governance | Ownership | |||
| UMT Holdings, L.P. ("UMTH") | 99.9% owner of our borrower, UMTHLC and our advisor, UMTHGS | UMT Services, Inc. serves as General Partner | 10 Limited Partners | |||
| UMTH Lending Company, L.P. ("UMTHLC") | Borrower | UMT Services, Inc. serves as General Partner | 99.9% owned by UMTH | |||
| UMTH Land Development, L.P. ("UMTHLD") | Asset Manager for UDF I and General Partner of UDF III | UMT Services, Inc. serves as General Partner | 99.9% owned by UMTH | |||
| United Development Funding, L.P. ("UDF I") | Borrower | United Development Funding, Inc., serves as General Partner | 41 Limited Partners | |||
| United Development Funding III, L.P. ("UDF III") | Loan Participant | UMTHLD serves as General Partner | 9003 Limited Partners | |||
| Capital Reserve Group, Inc. ("CRG") | Borrower | 2 UMTH Limited Partners serve as directors | Owned by 2 UMTH Limited Partners | |||
| Ready America Funding Corp. ("RAFC") | Borrower | 2 UMTH Limited Partners serve as directors | Beneficially owned by 2 UMTH Limited Partners | |||
| South Central Mortgage, Inc. ("SCMI") | Note Seller | One UMTH Limited Partner serves as director | Beneficially owned by 1 UMTH Limited Partner | |||
| Wonder Funding, L.P. ("Wonder") | Borrower | One UMTH Limited Partner serves as director | Beneficially owned by 1 UMTH Limited Partner | |||
Note - None of the Company’s trustees or officers hold a direct or beneficial interest in any of the above related parties.
Related Party Receivables
The following table summarizes our related party loans and obligations and corresponding outstanding balances as of December 31, 2014 and 2013. The amounts shown in the table below are included in the consolidated balance sheets.
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| 2014 | 2013 | Collateral | ||||||||
| Interim loans, related parties | ||||||||||
| RAFC | $ | 15,830,254 | $ | 16,282,339 | Real estate | |||||
| Total | 15,830,254 | 16,282,339 | ||||||||
| Lines of credit receivable, related parties | ||||||||||
| UDF I | $ | 8,580,538 | $ | 7,739,415 | Land development loans and equity investments | |||||
| UDFI (UDF III economic interest participation agreement) | 74,686,618 | 70,835,104 | Land development loans and equity investments | |||||||
| UMTHLC | 7,576,966 | 7,576,966 | Real estate | |||||||
| Total | $ | 90,844,122 | $ | 86,151,485 | ||||||
| Recourse obligations, related parties | ||||||||||
| CRG | $ | 4,504,044 | $ | 4,504,544 | Pledge of equity interest & limited guaranty | |||||
| RAFC | 10,267,408 | 10,170,196 | Pledge of equity interest & limited guaranty | |||||||
| SCMI | 3,448,002 | 3,448,002 | Pledge of equity interest & limited guaranty | |||||||
| RAFC/Wonder | 1,971,536 | 1,971,536 | Pledge of equity interest & limited guaranty | |||||||
| Total | $ | 20,190,990 | $ | 20,094,278 | ||||||
| Deficiency note, related party | ||||||||||
| UMTHLC | $ | 28,739,855 | $ | 29,295,567 | Guaranty | |||||
The following is a brief description of the Company’s related party receivables, by type, and related collateral.
Interim Loans, Related Parties
The Company has loaned money to UMTHLC and RAFC secured by Interim Loans for the acquisition and renovation of single-family homes made by UMTHLC and RAF to non-related third parties borrowers. These loans are collaterally assigned to the Company as security for the Interim Loans between UMTHLC and RAFC and the Company. These loan balances are included in “Interim loans, related parties” in the Company’s consolidated balance sheets.
Lines of Credit, Related Parties – UDF, UDF III and UMTH LC
UDF and UDF III
The Company has entered into a revolving line of credit (“Loan”) with UDF, secured by the pledge of all of UDF's land development senior and subordinated real estate secured loans and equity investments.
The Company has entered into an Economic Interest Participation Agreement with UDF III, pursuant to which UDF III purchased an economic interest in the UDF Loan and was granted an option to acquire a full ownership participation interest in the Loan. The advances funded by UDF III are exactly offset by a participation payable amount to UDF III; therefore the Company does not earn any net interest income on the advances made by UDF III and has no net collectability exposure under the Economic Interest Participation Agreement.
The above loan balances are included in “Lines of credit receivable, related parties” in the Company’s consolidated balance sheets.
UMTHLC
The Company has entered into a secured line of credit promissory note with UMTHLC in the amount of $8,000,000. The line of credit is secured by first lien mortgage interests in single family residential properties.
These loan balances are included in “Lines of credit receivable, related parties” in the Company’s consolidated balance sheets.
Recourse Obligations, Related Parties
CRG, RAFC and Wonder made Interim Loans to non-related third party borrowers for the acquisition and renovation of single-family homes. The Company made loans, with recourse, to each of these entities. Each of these entities used the proceeds from such loans to originate loans to non-related third party borrowers, which are referred to as "underlying loans," that are pledged to the Company as security for the Company’s loans made to them. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed to the Company is also due in full.
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In addition to the loans made, with recourse, to CRG, RAFC, and Wonder, the Company purchased long term Residential Mortgage loans from SCMI referred to as "purchased loans," and entered into recourse agreements under which SCMI agreed to repay certain losses the Company incurred with respect to the purchased loans by delivering an unsecured deficiency note in the amount of the deficiency to the Company.
All amounts due from each related party under the recourse obligations and deficiency notes described above have been consolidated into secured promissory notes (“Recourse Obligations”). The security for the Recourse Obligations consists of a pledge of each related party’s respective Class C and Class D ownership units in UMTH and in the case of Wonder secured by a limited indemnification agreement between UMTH and the Company. This collateral represents capital shares in UMTH and is eligible for, and receives, quarterly distributions from UMTH. See “Management’s Collectability Analysis for Related Party Recourse Obligations and Deficiency Notes” below for management’s valuation of collateral securing the related party obligations.
Based upon the collectability analysis performed by it, the Company has concluded that the guarantors have the ability to perform their obligations under the guaranties and that the Recourse Obligations are fully realizable.
These Recourse Obligation balances are included in “Recourse obligations, related parties” in the Company’s consolidated balance sheets.
See Note N Subsequent Events for additional information regarding the Recourse obligations, related parties.
Deficiency Note, Related Party
As noted above, the Company has loaned money to UMTHLC to fund the origination of Interim Loans to their borrowers. If UMTHLC or the Company forecloses on a property securing an Interim Loan, and the proceeds from the sale are insufficient to pay the loan in full, UMTHLC delivers an unsecured deficiency note in the amount of the deficiency to the Company. In 2007, UMTHLC issued to the Company a promissory note to evidence its deficiency obligations to the Company (the “Deficiency Note”). The Deficiency Note is secured by a limited guaranty by UMTHGS, the Advisor. The Deficiency Note balance is included in “Deficiency note, related party” in the Company’s consolidated balance sheets.
1) UMTH is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTHLC, which originates Interim Loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in UDF and acts as UDF's asset manager, and PSC, which serviced the Company’s residential mortgages and contracts for deed and manages the Company’s real estate owned (“REO”). In addition, UMTH has a limited guarantee of the obligations of CRG, RAFC, and SCMI, a Texas corporation that sold mortgage investments to the Company, under the Secured Notes. UDF III which is managed by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit and has purchased an economic participation in a revolving credit facility we have provided to UDF.
2) UMTHLC is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC so it can make loans to its borrowers. The loans are collaterally assigned to the Company, as security for the promissory note between UMTHLC and the Company. On March 26, 2009, the Company executed a secured line of credit promissory note with UMTHLC in the amount of $8,000,000. The note bears interest at 12.50% per annum, matured on September 26, 2012 and is secured by first lien mortgage interests in single family residential properties. The Company is negotiating an extension of this loan with UMTHLC with similar terms. The outstanding balance on this line of credit at December 31, 2014 and December 31, 2013, was approximately $7,577,000 for both periods, respectively, and is included in the balances noted in the paragraph above.
See Note C Deficiency Notes - Related Party and non-related party above for discussion of additional related party transactions with UMTHLC.
See Note N Subsequent Events for additional information regarding the Deficiency Note receivable from UMTHLC.
3) CRG is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which owns the Advisor. CRG was in the business of financing home purchases and renovations by real estate investors. The Company loaned money to CRG to make loans to other borrowers. During 2006 the Company took direct assignment of the remaining loans from CRG with full recourse.
4) RAFC is a Texas corporation that is 50% owned by SCMI, which is owned by Todd Etter. RAFC is in the business of financing Interim Loans for the purchase of land and the construction of modular and manufactured single-family homes placed on the land by real estate investors. The Company continues to directly fund obligations under one existing RAFC loan, which was collaterally assigned to the Company, but does not fund new originations and the Company is in the process of foreclosing on the collateral in California. The unpaid principal balance of the loans at December 31, 2014 and 2013 was approximately $15,830,000, and $16,282,000, respectively.
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5) Wonder is a Delaware limited partnership that is owned by RMC. RMC is beneficially owned by Craig Pettit. Wonder is in the business of financing Interim Loans for the purchase of land and the construction of single family homes. The Company has ceased funding any new originations. As of December 31, 2014, all remaining obligations owed by Wonder to the Company are included in the Recourse Obligations discussed below.
6) Recourse Obligations. The Company has made recourse loans to (a) CRG, which is owned by Todd Etter and William Lowe, (b) RAFC, which is owned by SCMI and two companies owned by Craig Pettit, Eastern Intercorp, Inc. and Ready Mortgage Corp. (“RMC”), and (c) SCMI, which is owned by Todd Etter, (these companies are referred to as the "originating companies"). In addition to the originating companies discussed above, the Company made loans with recourse to Wonder. Each of these entities used the proceeds from such loans to originate loans, that are referred to as "underlying loans," that are pledged to the Company as security for such originating company's obligations to the Company. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.
In addition, some of the originating companies have sold loans to the Company, referred to as the "purchased loans," and entered into recourse agreements under which the originating company agreed to repay certain losses the Company incurred with respect to purchased loans.
If the originating company forecloses on property securing an underlying loan, or the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering an unsecured deficiency note in the amount of the deficiency to the Company.
On March 30, 2006, but effective December 31, 2005, the Company and each originating company agreed to consolidate (1) all outstanding amounts owed by such originating company to the Company under the loans made by the Company to the originating company and under the deficiency notes described above and (2) the estimated maximum future liability to the Company under the recourse arrangements described above, into secured promissory notes. Each originating company issued to the Company a secured variable amount promissory note dated December 31, 2005 (the “Secured Notes”) in the principal amounts shown below, which amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to increase up to the maximum amounts shown below if the Company incurs losses upon the foreclosure of loans covered by recourse arrangements with the originating company. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on the Class C and Class D units of limited partnership interest of UMT Holdings held by each originating company.
Management’s Collectability Analysis for Related Party Recourse Obligations and Deficiency Notes
Recourse Obligations and Deficiency Notes are resultant from a shortfall in the repayment of an underlying loan securing a loan to a related party or in the shortfall in repayment from a defaulted and foreclosed Residential Mortgage or Interim Loan purchased from a related party. In both cases, the Company has recourse to the related party for the shortfall. Unlike the original underlying loan or purchased mortgage, the related party’s Recourse Obligation is not secured by a lien on a real property. Recourse Obligations of CRG, RAFC, SCMI and Wonder are secured by the pledge of equity interests held in UMTH. The UMTHLC Deficiency Note is secured by the guaranty of UMTHLC and the limited guaranty of UMTHGS including pledge of up to 33% of the advisory fee received by UMTHGS. Because the obligations are secured by third party collateral and guarantees, management conducts quarterly analysis of the integrity and value of the security for each obligation, and makes a determination of the collectability of the obligations based on the collateral value and cash flows derived from the collateral.
In making these loans, we considered a number of factors to preserve and enhance our ability to be repaid. The security for the Recourse Obligations of CRG, RAFC and SCM consists of pledges of each related party’s respective Class C and Class D ownership units in UMTH. This collateral represents capital shares in UMTH and is eligible for, and receives, quarterly distributions from UMTH. Class C units are entitled to a total distribution of $1,000 per unit and the value of the C unit collateral is determined through multiplying the number of pledged units remaining times $1,000. Class D units are entitled to perpetual distributions and are valued using a discounted cash flow (“DCF”) model that is reviewed and updated each quarter. The integrity of the C and D unit collateral is determined by the distribution priority given to each unit by the UMTH general partner and the reliability of forecasted distributions. Security for the Recourse Obligation of Wonder consists of a limited indemnification agreement in the initial amount of $1,134,000. The table below depicts the remaining collateral value securing the Recourse Obligations at December 31, 2014.
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| Name | Initial principal amount | Balance at December 31, 2014 | Promissory Note principal amount (2) | Units pledged as security | C Units distributed during 2014 | Units remaining | Estimated Collateral Value (3) | |||||||||||||||||
| CRG | $ | 2,725,442 | $ | 4,504,044 | $ | 4,300,000 | 4,984 Class C and 2,710 Class D | 19 | 2,380 Class C and 2,710 Class D | $ | 5,027,000 | |||||||||||||
| RAFC | $ | 3,243,369 | $ | 10,267,408 | $ | 7,100,000 | 11,228Class C, 6,659 Class D | 68 | 8,626 Class C and 6,659 Class D | $ | 10,560,000 | |||||||||||||
| SCMI | $ | 3,295,422 | $ | 3,448,002 | $ | 3,488,643 | 4,545 Class C and 3,000 Class D | 8 | 977 Class C and 3,000 Class D | $ | 3,656,000 | |||||||||||||
| RAFC / Wonder(1) | $ | 1,348,464 | $ | 1,971,536 | $ | 1,400,000 | 1,657 Class C | 12 | 1,470 Class C | $ | 1,471,000 | |||||||||||||
| Wonder Indemnification (1) | n/a | n/a | n/a | $1,134,000 | - | n/a | $ | 822,000 | ||||||||||||||||
| Totals | $ | 10,612,697 | $ | 20,190,990 | $ | 16,288,643 | $ | 21,536,000 | ||||||||||||||||
| (1) | Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation. |
| (2) | The CRG, RAFC and Wonder balances at December 31, 2014 exceeded the stated principal amount per their variable Secured Notes by approximately $204,000, $3,167,000 and $572,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) than we originally anticipated and outpaced the minimum principal reductions scheduled for the loans. |
| (3) | Estimated collateral value reflects pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions |
Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC, and RAFC/Wonder Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or (2) the amount of any distributions paid to the originating company with respect to the pledged Class C units. Effective October 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, modify the amortization schedules for the period of July 2007 through June 2009, and reduce the interest rate from 10% to 6%. The above modifications have been extended through December 31, 2014. Management has accounted for these as loan modifications in the normal course of business, and not as a troubled debt restructuring, as the underlying collateral value exceeds the outstanding loan amounts, the modifications did not include an extension of the debt’s original contractual maturity or expected duration, the borrowers and guarantors have obtained third party financing at current market rates, the modified rate represents a premium over current market rates and the risk characteristics of the third party debt obtained is similar to the modified debt. The Company expects to receive full repayment under the loan.
Cash Flow Analysis
The ability to perform is principally dependent upon the forecasted cash distributions associated with the pledged collateral and the ability of the distributions to meet the debt service requirements under the Recourse Obligations. On a quarterly basis, the Company conducts a review of the collateral pledged by the underlying borrowers and third party guarantors in order to assess their ability to perform their obligations under the terms of the Recourse Obligations. This review includes analyzing the consolidated financial statements of UMT Holdings, L.P. including its cash flows and sources of cash flow, assets and net profits. In addition to reviewing the historical financial statements, we analyze projected future earnings and cash flows that will support distributions and validate the assumptions used to generate these projections, assessing the ability to execute on the business plan, conducting discussions with and obtaining representations from the guarantors’ management with respect to their current and projected distribution amounts. Management reviews near-term (1 year) and long-term (5 years) distribution forecasts associated with the UMTH Class C and D units, cash flow from the indemnification agreement, cash flow from UMTHGS advisory fees and cash flow to UMTHLC to determine if the forecasted cash flows are sufficient to meet the obligations. The available cash flow from UMTH, as shown in the Historical Performance table below, indicates sufficient cash flow from the guarantors to service the Recourse Obligations and the Deficiency Note. In addition to the above mentioned collateral, the Company has a guaranty limited to a maximum of $10,582,336 from UMTH of all amounts due under the Recourse Obligations. At December 31, 2014, the remaining balance of the limited guaranty was approximately $1,665,000.
The UMTHLC Deficiency Note is secured by the guaranty of UMTHLC and the limited guaranty of UMTHGS including pledge of up to 33% of the advisory fee received by UMTHGS. The value of both the UMTHLC guarantee and the UMTHGS limited guarantee is determined by the cash flow associated with either UMTHLC or the amount of advisory fees earned by UMTHGS.
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On a quarterly basis, the Company conducts a review of the collateral pledged by the underlying borrowers and third party guarantors in order to assess their ability to perform their obligations under the terms of the Recourse Obligations. The collateral pledged consists of class C and D ownership units of UMT Holdings, L.P. These units represent capital shares in UMT Holdings, L.P. and are eligible for, and receive, quarterly distributions from UMT Holdings, L.P. Such ability to perform is principally dependent upon the forecasted cash distributions associated with the pledged collateral and the ability of the distributions to meet the debt service requirements under the Secured Notes. The review includes analyzing projected future distribution sources and amounts, validating the assumptions used to generate such projections, assessing the ability to execute on the business plan, conducting discussions with and obtaining representations from the guarantors’ management with respect to their current and projected distribution amounts. The value of the pledged collateral is estimated using a discounted cash flow model that is reviewed and updated each quarter. Based on such reviews, the Company has concluded that the guarantors have the ability to perform under their repayment obligations and that the Recourse Obligations are fully realizable. Accordingly, the Company has not recorded any reserves on these loans.
The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:
| - | UMT Holdings. This guaranty was limited to a maximum of $10,582,336 of all amounts due under the Secured Notes. At December 31, 2014, the remaining balance of the limited guaranty was approximately $1,665,000. |
| - | WLL, Ltd., a related party of CRG. This guaranty is of all amounts due under Secured Note from CRG, is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd. |
| - | RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings. |
| - | Wonder. Wonder Funding obligations are evidenced by a note from RAFC (RAFC/Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above. |
| - | SCMI. This guaranty is limited to a maximum of $2,213,000 due under the Secured Note from RAFC and is secured by an assignment of 2,213 Class C units of limited partnership interest of UMT Holdings. |
| - | KLA, Ltd. KLA has given the following limited guaranties: (1) Guaranty of obligations of SCMI under the First Amended and Restated Secured Variable Amount Promissory Note to the Company dated as of October 1, 2007 with a then current principal balance of $3,472,073 and is secured by an assignment of 3,000 of Guarantor’s Class D units of partnership interest in UMT Holdings, L.P. (2) Guaranty of obligations of CRG under the First Amended and Restated Secured Variable Amount Promissory Note dated as of October 1, 2007 with a then current principal balance of $4,053,799 and is secured by a pledge of 1,355 of Guarantor’s Class D units of partnership interest in UMTH. |
In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made to William Lowe by UMT Holdings. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to the Company to secure its guaranty of Capital Reserve Corp.'s obligations under its Secured Note, UMT Holdings and the Company entered into an Intercreditor and Subordination Agreement under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to the Company’s lien on such units.
Historical Performance
Management also considers historical cash flows and payment history to make an assessment of the collectability of the obligations. The table below depicts the historical cash flows for each obligor and the payment history under its obligation for the years ended December 31, 2014, 2013 and 2012. To date, the obligors have met all of their financial obligations to the Company.
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Obligor | Cash Flow | Payments | Cash Flow | Payments | Cash Flow | Payments | ||||||||||||||||||
| UMTH (2),(3) | $ | (253,834 | ) | $ | 1,105,158 | $ | 15,592,306 | $ | 3,492,500 | $ | 12,842,083 | $ | 2,813,601 | |||||||||||
| UDF (2),(4) | $ | 7,911,149 | $ | - | $ | 10,785,187 | $ | - | $ | 11,728,909 | $ | - | ||||||||||||
| CRG (1) | $ | 22,766 | $ | 22,766 | $ | 172,884 | $ | 172,884 | $ | 171,641 | $ | 171,641 | ||||||||||||
| RAFC (1) | $ | 77,585 | $ | 77,585 | $ | 589,816 | $ | 589,816 | $ | 583,796 | $ | 583,796 | ||||||||||||
| SCMI (1) | $ | 12,077 | $ | 12,077 | $ | 91,833 | $ | 91,833 | $ | 390,343 | $ | 90,343 | ||||||||||||
| Wonder (1) | $ | 11,569 | $ | 11,569 | $ | 87,957 | $ | 87,957 | $ | 86,556 | $ | 86,556 | ||||||||||||
| (1) | Unaudited. |
| (2) | Audited. |
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| (3) | Represents available cash flow for debt service and distributions. UMTH generates cash flow that is used to service the UMTHLC Deficiency Note and the Recourse obligations. |
| (4) | Represents principal payment proceeds received by UDF from its borrowers. These receipts are the sources used by UDF to repay its line of credit payable to the Company. |
Based on its review of the quality and integrity of the security, the forecasted cash flows and the historical performance of each obligor, management has determined the cash flows of the obligor to be sufficient to meet the terms of the Recourse Obligations and Deficiency Notes.
These loans were reviewed by management and no reserves on principal amounts are deemed necessary at December 31, 2014 or 2013.
7) On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note as modified by an amendment effective September 1, 2006 (the "Amendment") with UDF; a Nevada limited partnership that is a related party of the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects. On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
The Loan is secured by the pledge of all of UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”). Those UDF loans may be first lien loans or subordinate loans.
The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%. Effective October 1, 2013, the loan was extended to December 31, 2014 and the base interest rate was decreased to a rate of 9.25%. Effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.
On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”). On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2012, the loan was extended for a period of one year and matures on December 31, 2013, and the loan amount was increased from $75,000,000 to $82,000,000. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.
The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. At December 31, 2014 and 2013 UDF III had outstanding approximately $83,267,000, and $78,575,000, respectively, to UDF under this agreement of which approximately $74,687,000, and $70,835,000 were outstanding under the Economic Interest Participation Agreement at December 31, 2014 and 2013, respectively.
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The following table summarizes the lines of credit receivable, related parties, as of December 31, 2014 and 2013:
| 2014 | 2013 | |||||||
| UDF I | $ | 8,580,000 | $ | 7,739,000 | ||||
| UDF I (UDF III Economic Interest Participation Agreement) | 74,687,000 | 70,835,000 | ||||||
| UMTH LC | 7,577,000 | 7,577,000 | ||||||
| Balance, end of year | $ | 90,844,000 | $ | 86,151,000 | ||||
8) Loans made to related parties of the Advisor. Below is a table of the aggregate principal amount of mortgages funded each year indicated, from the companies related to the Advisor, and named in the table and aggregate amount of draws made by UDF under the line of credit, during the three years indicated:
| Related Party Company | 2014 | 2013 | 2012 | |||||||||
| UMTHLC | - | $ | 15,000 | $ | 587,000 | |||||||
| UDF | $ | 841,000 | $ | 1,053,319 | $ | 823,000 | ||||||
9) As of August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2013) the Company entered into an Advisory Agreement with UMTHGS. Under the terms of the agreement, UMTHGS is paid a monthly trust administration fee. The fee is calculated monthly depending on the Company’s annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month, however, our Advisor has limited annual the trust administration fee to the lesser of i) 1% of our average invested assets, or ii) $1,000,000. During 2014, 2013, and 2012 the expenses for the Company’s Advisor were approximately $1,000,000, respectively, and actual payments made were approximately $1,000,000, $1,125,000 and $731,000, respectively. The Advisor and its related parties are also entitled to reimbursement of costs of goods, materials and services obtained from non-related third parties for the Company’s benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for the Company or to dispose of any of its investments. The Company paid the Advisor $78,000 as reimbursement for costs associated with providing shareholder relations activities during 2014 compared to $86,000, and $76,000 in 2013 and 2012, respectively.
The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which the Company’s net income for a year exceeds a 10% per annum non-compounded cumulative return on its adjusted contributions. No incentive fee was paid during 2014 or 2013. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 Shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2014 and 2013, the Advisor has not received options to purchase shares under this arrangement.
The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from the Company.
The Advisory Agreement also provides for the Company to pay to the Advisor, or a related party of the Advisor, a debt placement fee. The Company may engage the Advisor, or a related party of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit. The Company paid debt placement fees of approximately $150,000 in August 2013 to a related party of the Advisor. These fees are amortized monthly, as an adjustment to interest expense, over the term of the credit facility agreements described in Note D. The Company amortized (expensed) approximately $71,000 and $52,000 and $42,000 of these fees in 2014, 2013 and 2012, respectively.
10) The Company pays loan servicing fees to PSC, a subsidiary of UMTH, under the terms of a Mortgage Servicing Agreement. The Company paid loan servicing fees of approximately $1,000, $5,000, and $19,000, during 2014, 2013, and 2012, respectively.
11) The Company pays “guarantee” credit enhancement fees to UDF III, related party of PSC and UDF, as specified under the terms of the UDF Guarantee agreement. In 2014, 2013 and 2012, the Company made cash payments in the amount of $104,000, $78,000, and $66,000, respectively, as compensation of said guarantee fees. In 2014, 2013 and 2012, the related credit enhancement expenses were approximately $114,000, $77,000, and $109,000, respectively.
12) Related parties UDF LOF, UDF IV and UDF X, are reimbursed for their degree of invested “participatory” interest in the Company’s construction loans, the degree of invested interest is not to succeed $2,000,000. The Company made payments of such participation interest, as a net amount against the construction loan interest, in 2014, 2013, and 2012, in the amounts of $2,260,000, $791,000, and $1,719,000, respectively.
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13) The Company pays UMTH LD, administrative and origination fees, for the construction loans in which UDF related parties take an invested interest in. The fees are withheld from construction draws funded to the borrower, and are in turn paid directly to UMTH LD. In 2014, 2013, and 2012, payments were made for the above administrative and origination fees in the amounts of $188,000, $201,000, and $161,000, respectively.
14) As of December 31, 2013, the Company had, included in other assets, a receivable from PSC of approximately $200,000. This balance was paid in full in 2014.
The chart below summarizes the approximate payments associated with related parties for the twelve months ended December 31, 2014, 2013 and 2012:
| Related Party Payments: | ||||||||||||||||||||||||||
| For Twelve Months Ended | ||||||||||||||||||||||||||
| Payee | Purpose | December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| UMTHGS | Trust administration fees | $ | 1,000,000 | 93 | % | $ | 1,125,000 | 93 | % | $ | 731,000 | 91 | % | |||||||||||||
| UMTHGS | General & administrative - Shareholder Relations | 78,000 | 7 | % | 86,000 | 7 | % | 76,000 | 9 | % | ||||||||||||||||
| $ | 1,078,000 | 100 | % | $ | 1,211,000 | 100 | % | $ | 807,000 | 100 | % | |||||||||||||||
| PSC | Loan Servicing Fee | $ | 1,000 | 7 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||
| PSC | General & Administrative – Misc. | 14,000 | 93 | % | - | 0 | % | - | 0 | % | ||||||||||||||||
| $ | 15,000 | 100 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||||
| UMTH | Debt Placement Fees | $ | - | - | $ | 150,000 | 100 | % | $ | - | - | |||||||||||||||
| UDF III | Credit Enhancement Fees | $ | 104,000 | 100 | % | $ | 78,000 | 100 | % | $ | 66,000 | 100 | % | |||||||||||||
| UDF IV | Participation Interest Paid | $ | 2,260,000 | 100 | % | $ | 791,000 | 100 | % | $ | 1,696,000 | 100 | % | |||||||||||||
| UDF X | Participation Interest Paid | $ | - | - | $ | - | - | $ | 23,000 | 100 | % | |||||||||||||||
| UMTH LD | Admin and Origination Fees Paid | $ | 188,000 | 100 | % | $ | 201,000 | 100 | % | $ | 161,000 | 100 | % | |||||||||||||
The chart below summarizes the approximate expenses associated with related parties for the twelve months ended December 31, 2014, 2013 and 2012:
| Related Party Expenses: | ||||||||||||||||||||||||||
| For Twelve Months Ended | ||||||||||||||||||||||||||
| Payee | Purpose | December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| UMTHGS | Trust administration fees | $ | 1,000,000 | 93 | % | $ | 1,000,000 | 93 | % | $ | 1,000,000 | 93 | % | |||||||||||||
| UMTHGS | General & administrative - Shareholder Relations | 76,000 | 7 | % | 76,000 | 7 | % | 76,000 | 7 | % | ||||||||||||||||
| UMTHGS | General & administrative –Misc. | 1,000 | 0 | % | 1,000 | 0 | % | 2,000 | 0 | % | ||||||||||||||||
| $ | 1,077,000 | 100 | % | $ | 1,077,000 | 100 | % | $ | 1,078,000 | 100 | % | |||||||||||||||
| PSC | Loan Servicing Fee | $ | 1,000 | 7 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||
| PSC | General & Administrative – Misc. | 14,000 | 93 | % | - | - | - | - | ||||||||||||||||||
| $ | 15,000 | 100 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||||
| UMTH | Debt Placement Fees | $ | 71,000 | 100 | % | $ | 52,000 | 100 | % | $ | 42,000 | 100 | % | |||||||||||||
| UDF III | Credit Enhancement Fees | $ | 114,000 | 100 | % | $ | 77,000 | 100 | % | $ | 109,000 | 100 | % | |||||||||||||
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I. COMMITMENTS AND CONTINGENCIES
The Company’s shares of [common stock/beneficial interest] are not traded on an exchange. Below is a description of the Company’s Share Redemption Plan (“SRP”) and Dividend Reinvestment Plan (“DRP”). Also See Note L of these Notes to Consolidated Financial Statements for additional discussion of the SRP.
On March 18, 2009, the Board approved certain modifications to the Company’s SRP and its DRP. Pursuant to the requirements of the SRP and the DRP, the Company sent its shareholders notice of amendment of the SRP and the DRP, both of which became effective on May 1, 2009. The modifications consisted of the following:
Modifications to the Share Redemption Plan
The redemption price is equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by the Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2014 the NAV was $14.81 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long-term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long- term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Currently our share redemptions are limited to death and medical hardship requests as approved by our trustees on a case-by-case basis.
Effective April 15, 2015, pursuant to the terms of the DRP, the Board of Trustees elected to suspend the DRP until further notice. Please refer to our Report on Form 8-K filed on March 3, 2015 for further information about the modification to the DRP.
J. CONCENTRATION OF CREDIT
Financial instruments that potentially expose the Company to concentrations of credit risk are primarily temporary cash equivalents, mortgage notes receivable, investment in trust receivable, line of credit receivable, Deficiency Notes and Recourse Obligations from related parties. The Company maintains deposits in financial institutions that may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.
At December 31, 2014, 2013, and 2012, approximately 38%, 38%, and 42%, respectively, of the Company’s Interim Loan investments were secured by property located in Texas. All of the Company’s Mortgage Investments are in the United States. At December 31, 2014, 2013, and 2012, approximately 61%, 61%, and 57%, respectively, of the Company’s interim mortgage investments were secured by property located in California.
Interim Loans made to related parties of the Company’s Advisor, lines of credit receivable, Deficiency Notes and Recourse Obligations are monitored by the Company for collectability, and the Company believes the unreserved amounts will be fully collectible.
K. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data (unaudited) for the years ended December 31, 2014, 2013 and 2012 is set forth below:
| 2014 | Revenues | Net Income | Net Income Per Share of Beneficial Interest | Weighted Average Shares Outstanding | ||||||||||||
| First quarter | $ | 1,208,180 | $ | 110,130 | $ | 0.02 | 6,436,065 | |||||||||
| Second quarter | 1,259,077 | 77,702 | 0.01 | 6,435,202 | ||||||||||||
| Third quarter | 1,351,332 | 67,824 | 0.01 | 6,433,848 | ||||||||||||
| Fourth quarter | 1,538,092 | 361,710 | 0.06 | 6,432,141 | ||||||||||||
| For the year | $ | 5,356,681 | $ | 617,366 | $ | 0.10 | 6,434,023 | |||||||||
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| 2013 | Revenues | Net Income | Net Income Per Share Basic/Diluted | Weighted Average Shares Outstanding | ||||||||||||
| First quarter | $ | 1,338,295 | $ | 82,572 | $ | 0.01 | 6,438,493 | |||||||||
| Second quarter | 1,608,561 | 468,246 | 0.07 | 6,437,165 | ||||||||||||
| Third quarter | 1,417,877 | 383,412 | 0.06 | 6,437,171 | ||||||||||||
| Fourth quarter | 1,283,609 | 253,468 | 0.04 | 6,436,777 | ||||||||||||
| For the year | $ | 5,648,342 | $ | 1,187,698 | $ | 0.18 | 6,437,428 | |||||||||
| 2012 | Revenues | Net Income | Net Income Per Share Basic/Diluted | Weighted Average Shares Outstanding | ||||||||||||
| First quarter | $ | 1,175,271 | $ | 250,613 | $ | 0.04 | 6,439,120 | |||||||||
| Second quarter | 1,529,096 | 491,272 | 0.08 | 6,439,559 | ||||||||||||
| Third quarter | 1,338,634 | 339,505 | 0.05 | 6,439,657 | ||||||||||||
| Fourth quarter | 1,465,406 | 405,186 | 0.06 | 6,439,600 | ||||||||||||
| For the year | $ | 5,508,407 | $ | 1,486,576 | $ | 0.23 | 6,439,528 | |||||||||
L. SECURITIZATION AND SALE OF CLASS A NOTES
In April 2004, but effective January 1, 2004, United Mortgage Trust transferred certain residential mortgages and contracts for deed to a wholly-owned special purpose entity called UMT LT Trust (”UMTLT”), a Maryland real estate investment trust.
On April 13, 2004, through UMTLT (“Seller”) and another newly created, wholly-owned subsidiary, UMT Funding Trust, a Maryland real estate investment trust, as the “Depositor”, the Company completed a securitization of $12,593,587 principal amount of mortgage loans through the private issuance of $9,455,520 in 9.25% Class A Notes (“Class A Notes”). The Class A Notes, together with $3,138,067 in Class B Certificates (the “Certificates” and collectively with the Class A Notes, the “Securities”) were issued by Wachovia Bank as “trustee” pursuant to a Trust Agreement dated as of April 1, 2004 between the Bank and the Depositor (the “Trust Agreement’). The Securities evidence the entire beneficial ownership interest in a trust fund created under the Trust Agreement, which consists of a pool of performing first lien residential mortgage loans (the “Mortgage Loans”) with an aggregate principal balance of $12,593,587 as of April 13, 2004. The Company transferred the Mortgage Loans to the Seller as a capital contribution and the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement dated as of April 1, 2004 (“Mortgage Loan Sale Agreement”). The Class A Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended.
The Depositor then sold the $9,455,520 of the 9.25% Class A Notes to Bayview Financial Trading Group, L.P. (“Bayview”), at one hundred percent (100%) of the original balance of the senior security (the Class A Notes) plus accrued interest from the cut-off date to the date of purchase pursuant to a Purchase Agreement dated as of April 13, 2004 between Bayview, the Depositor and us. The Company accounted for this transaction as an asset sale at par value. The Class A Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. The Certificates were retained by the Depositor.
The Mortgage Loan Sale Agreement includes a right on the part of the Depositor to require the Seller to repurchase certain Mortgage Loans upon the Seller's breach of a representation or warranty with respect to certain characteristics of the Mortgage Loans. The Company agreed to guarantee the obligations of the Seller under the Mortgage Loan Sale Agreement, including the obligation of the Seller to repurchase Mortgage Loans as to which the Seller has breached a representation or warranty. The Certificates give the Depositor the right to receive all remaining monthly interest after all payments due on the Class A Notes and all principal and interest on the Mortgage Loans after retirement of the Class A Notes. The securitization was not an off balance sheet transaction since the Depositor retained the Certificates and the Certificates are carried on the balance sheet.
Simultaneously with the Depositor’s conveyance of the Mortgage Loans to the trustee and pursuant to the terms of a Servicing Rights Transfer Agreement dated as of April 1, 2004 the Company, as owner of the servicing rights to the Mortgage Loans, transferred the servicing rights to the Mortgage Loans to Bayview; and, pursuant to a Sub Servicing Agreement dated as of April 1, 2004, Prospect Service Corp. agreed to act as sub-servicer of the Mortgage Loans. Effective August 18, 2014, the Company executed a Servicing Transfer Agreement with Bayview Loan Servicing, LLC, a Delaware limited liability company (the “Successor Servicer”), in which the Company transferred all servicing rights to the Successor Servicer.
The purpose for the securitization and sale was to (1) increase the yield on the residential mortgages and (2) realize cash to invest in Interim Loans and UDF.
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On January 28, 2005, UMTLT and UMT Funding Trust simultaneously entered into agreements for the securitization of $9,700,797 principal amount of our mortgage loans through the private issuance of $7,275,598 in 9.25% Class A Notes. The purpose for the securitization was to (1) increase the yield on the Residential Mortgages and (2) realize cash to invest in interim loans and UDF. The Notes, together with $2,425,199 in Certificates, were issued by Wachovia Bank as trustee pursuant to a Trust Agreement dated as of January 1, 2005 between the Bank and the Depositor, UMT Funding Trust (the “2005 Trust Agreement”). The Securities evidence the entire beneficial ownership interest in a trust fund created under the 2005 Trust Agreement, which consists of a pool of Mortgage Loans with an aggregate principal balance of $9,700,797 as of January 1, 2005. We transferred the Mortgage Loans (excluding the servicing rights) to the Seller as a capital contribution and the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement dated as of January 1, 2005 (the “2005 Mortgage Loan Sale Agreement”).
The Depositor then sold the $7,275,598 of the 9.25% Class A Notes to Bayview Financial, L.P. (“Investor”), at one hundred percent of the senior security (Class A Notes) plus accrued interest from the cut-off date to the date of purchase pursuant to a Purchase Agreement dated as of January 26, 2005 between the Investor, the Depositor and us. We accounted for this transaction as an asset sale at par value. The Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. The Certificates were retained by the Depositor.
The 2005 Mortgage Loan Sale Agreement includes a right on the part of the Depositor to require the Seller to repurchase certain Mortgage Loans upon the Seller’s breach of a representation or warranty with respect to certain characteristics of the Mortgage Loans. The Company agreed to guarantee the obligations of the Seller under the 2005 Mortgage Loan Sale Agreement, including the obligation of the Seller to repurchase Mortgage Loans as to which the Seller has breached a representation or warranty. The Certificates give the Depositor the right to receipt all remaining monthly interest after all payments due on the Class A Notes and all principal and interest on the Mortgage Loans after retirement of the Class A Notes. The securitization was not an off balance sheet transaction since the Depositor retained the Certificates and the Certificates are carried on the balance sheet.
Simultaneously with the Depositor’s conveyance of the Mortgage Loans to the trustee and pursuant to the terms of a Servicing Rights Transfer Agreement dated as of January 1, 2005 the Company, as owner of the servicing rights to the Mortgage Loans, transferred the servicing rights to the Mortgage Loans to the Investor and, pursuant to a Sub Servicing Agreement dated as of January 1, 2005, Prospect Service Corp. agreed with the Investor to act as sub-servicer of the Mortgage Loans. Effective August 18, 2014, the Company executed a Servicing Transfer Agreement with Bayview Loan Servicing, LLC, a Delaware limited liability company (the “Successor Servicer”), in which the Company transferred all servicing rights to the Successor Servicer.
The Company has rights to future cash flows arising after the Investor in the securitization trust has received the 9.25% return for which it contracted.
Gain or loss on the sale of the mortgage loans depends in part on the previous carrying value of the loans involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair market value at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes were not available for the Company’s retained interests, so the Company estimated fair value based on the present value of future expected cash flows using management’s best estimate of the key assumptions: credit losses, prepayment rates and discount rates commensurate with the risks involved. The Company used an expected weighted-average life of 4.5 years. Based on expected credit losses of 3.4%, prepayment rate of 2.6% and a discount rate of 11.0%, no gain or loss was recognized related to the sale of these mortgage loans as the carrying value approximated the fair value at the date of the securitization.
The sensitivity to an immediate 10% and 20% adverse change in the assumptions used to measure fair value of the securitized mortgage loans is as follows:
| FOR THE 2004 SECURITIZATION | ||||
| Prepayment speed assumption (annual rate): | ||||
| Impact on fair value of 10% adverse change | 27,000 | |||
| Impact on fair value of 20% adverse change | 54,000 | |||
| Expected credit losses (over remaining life of loans): | ||||
| Impact on fair value of 10% adverse change | 56,000 | |||
| Impact on fair value of 20% adverse change | 111,000 | |||
| Residual cash flows discount rate (annual): | ||||
| Impact on fair value of 10% adverse change | 23,000 | |||
| Impact on fair value of 20% adverse change | 46,000 |
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Because the Company’s carrying value of the 2005 securitization was fully amortized as of December 31, 2010, the adverse change assumptions have no impact on the carrying value of this securitization at December 31, 2014 or 2013. These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
M. SHARE REDEMPTION PLAN
There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Plan. Our trustees have the discretion to modify or terminate the SRP upon 30 days’ notice. Under the terms of our plan as modified and effective on May 1, 2009 (see below for a further description of the plan modifications), shareholders who have held their shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 month period. The repurchase price is based on the NAV as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2014 and 2013 the NAV was $14.81 and $14.66 per share, respectively. Under the prior SRP terms, the redemption price was $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long-term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long-term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Currently our share redemptions are limited to death and medical hardship requests as approved by our trustees on a case-by-case basis. We have also purchased a limited number of shares outside of our SRP from shareholders with special hardship considerations. The Board received redemption requests for 32,039 shares and 19,708 shares were approved and redeemed during the year ended December 31, 2014. The Board received redemption requests for 72,297 shares and 17,847 shares were approved and redeemed during the year ended December 31, 2013.
Share repurchases have been at prices of $14.76 to $20.00 through our SRP. Shares repurchased for less than $20.00 per share were 1) shares held by shareholders for less than 12 months 2) shares purchased outside of our Share Redemption Program prior to the May 1, 2009 modifications to our SRP or 3) shares purchased under our SRP subsequent to the May 1, 2009 modifications to our SRP.
Effective April 15, 2015, pursuant to the terms of the DRP, the Board of Trustees elected to suspend the DRP until further notice. Please refer to our Report on Form 8-K filed on March 3, 2015 for further information about the modification to the DRP.
The Company complies with Distinguishing Liabilities from Equity topic of ASC, which requires, among other things, that financial instruments that represent a mandatory obligation of the Company to repurchase shares be classified as liabilities and reported at settlement value. The Company believes that shares tendered for redemption by the shareholder under the Company’s share redemption program do not represent a mandatory obligation until such redemptions are approved at the discretion of our board of trustees. At such time, the Company will reclassify such obligations from equity to an accrued liability based upon their respective settlement values. As of December 31, 2014 and 2013, the Company had no approved and unpaid redemption requests included in liabilities.
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The following table summarizes the share repurchases made in 2014:
| Month | Total number of shares repurchased | Average Purchase Price | Total number of shares purchased as part of a publicly announced plan | Total number of shares purchased outside of plan | ||||||||||||
| January | 1,795 | $ | 14.76 | 1,795 | - | |||||||||||
| February | 2,188 | $ | 14.76 | 2,188 | - | |||||||||||
| March | 627 | $ | 14.76 | 627 | - | |||||||||||
| April | 1,603 | $ | 14.66 | 1,603 | - | |||||||||||
| May | 2,324 | $ | 14.66 | 2,324 | ||||||||||||
| June | 1,039 | $ | 14.53 | 1,039 | - | |||||||||||
| July | 1,828 | $ | 14.53 | 1,827 | - | |||||||||||
| August | 2,216 | $ | 14.54 | 2,216 | - | |||||||||||
| September | 1,134 | $ | 14.56 | 1,134 | - | |||||||||||
| October | 2,644 | $ | 14.56 | 2,644 | - | |||||||||||
| November | 1,759 | $ | 14.56 | 1,759 | - | |||||||||||
| December | 551 | $ | 14.51 | 551 | - | |||||||||||
| Totals | 19,708 | $ | 14.62 | 19,708 | - | |||||||||||
N. SUBSEQUENT EVENTS
Suspension of DRP
Effective April 15, 2015, pursuant to the terms of the DRP, the Board of Trustees elected to suspend the DRP until further notice. Please refer to our Report on Form 8-K filed on March 3, 2015 for further information about the modification to the DRP.
Loan Modification
Certain of UMT’s affiliates are indebted to UMT pursuant to certain loan arrangements including (i) deficiency loans owing from UMTH Lending Company, L.P. (“UMTHLC”), (ii) recourse obligations owing from Capital Reserve Group, Inc., South Central Mortgage, Inc., Ready America Funding Corp. (“RAFC”) and (iii) certain payment obligations of UMT Holdings, L.P. (“UMTH”) in favor of UMT in connection with an indemnification agreement dated December 31, 2005 (the “Indemnification Agreement”) originally executed by UMTH in favor of RAFC, which Indemnification Agreement secures deficiency obligations owing to RAFC by Wonder Funding Corp., an affiliate of RAFC (“Wonder”).
In late 2013 and early 2014, the foregoing affiliates approached UMT with the proposal to modify the existing loans to:
| · | accelerate the repayment schedule and set repayment amounts on an aggregate indebtedness and reduction basis; |
| · | provide additional security on the indebtedness; and |
| · | reduce the interest rate to a market rate which would automatically adjust up to 6% upon the failure to make a scheduled payment. |
Our Board of Trustees met and reviewed the proposal and concluded that the modification of the loans is in the best interest of UMT and its shareholders because it would result in a faster payment of the indebtedness with greater security and because the benefits of those features would outweigh the loss of additional interest from reduction of the interest rate to a market rate. Specifically, the Trustees noted that the proposed modifications would shorten the duration of the deficiency note with UMTHLC and the recourse obligations by over 65% and 60%, respectively. Further, proposed modifications would increase the anticipated principal payments in the ensuing 36 months by over 355%. Further, the Trustees concluded that the additional collateral being pledged would increase the cash flow available in the event of a default on the modified loans and foreclosure on the collateral to an aggregate amount estimated to be approximately $3.15 million annually and constitute an aggregate notational value of the future distributions on the UMTH Series D Units to $9.5 million. On the basis of the foregoing analysis, our Board of Trustees approved the restructuring effective as of January 1, 2015.
On March 25, 2015, and effective as of January 1, 2015, United Mortgage Trust (“UMT”, “us” or “we”) entered into loan modification agreements with certain of its affiliated entities which are indebted to UMT under certain outstanding loan arrangements.
Summary of Modified Loans
As modified, each of the existing notes evidencing the indebtedness has been amended and the outstanding indebtedness divided into and evidenced by two new notes – Note No. 1, which matures on December 31, 2017, provided that such date shall be extended by one year for each annual transfer of principal made from Note No. 2, and Note No. 2 which matures on December 31, 2017. The forms of the notes, which are identical for each obligor, except for the principal balances, were included as exhibits to the Report on Form 8-K filed on March 30, 2015.
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Quarterly, such portion of the outstanding principal balance of Note No. 2 as is necessary to restore the outstanding principal balance of Note No. 1 to its initial principal balance shall be transferred from Note No. 2 to Note No. 1 and such transferred principal balance shall become part of the outstanding principal balance of Note No. 1, payable in accordance with, and subject to all of the terms and conditions of Note No. 1. This process will be repeated for each note until all of the indebtedness has been paid.
The interest rate of all Notes No. 1 is equal to the higher of: (a) 1.75% or (b) the imputed interest/applicable federal rate rules set forth in Sections 483 or 1274 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (“AFR”) and the interest rate on all Notes No. 2 is equal to the higher of: (a) 2.70% or (b) the AFR.
The modified notes require the payment of a minimum cumulative quarterly payment and a minimum cumulative annual payment from all of the obligors. The failure to make the minimum cumulative annual payment within 30 days after notice of such failure or the commission of any act of bankruptcy, general assignment for the benefit of creditors, or any existence of a proceeding under any insolvency or bankruptcy law by or against any obligor constitutes a default under all of the notes. Upon the occurrence of an event of default, the interest rate is automatically increased to 6% per annum from the date of such default until the entire outstanding balance of principal and interest is paid.
Security
Previously, the security for the deficiency obligation from UMTHLC consisted of the limited guaranty of our Advisor, UMTH General Services, L.P. (“UMTHGS”), including the pledge of up to 33% of the advisory fee received by UMTHGS. Previously, the security for the recourse obligations consisted of a pledge of each related party’s respective Class C and Class D ownership units in UMTH and in the case of Wonder, secured by a limited indemnification agreement between UMTH and the Company. This collateral represents capital shares in UMTH and is eligible for, and receives, quarterly distributions from UMTH.
The new cross-collateralized security provided for the modified loans consists of:
The same security as provided earlier plus:
| · | pledge by the limited partners of UMTH of the distributions of previously unencumbered UMTH Series D Units; |
| · | assignment by UMTH of certain fees to which UMTH is entitled under certain securitization transactions; |
| · | assignment general partnership distributions by UMTH as the general partner of United Residential Home Finance, L.P. |
| · | assignment of general partnership distributions by UMT HF GP Manager, LLC as the general partner of UMT Home Finance III, L.P.; |
| · | assignment of general partnership distributions by UMT HF GP Manager, LLC as the General Partner of UMT Home Finance II, LP; |
| · | assignment of general partnership distributions by UMT HF Manager, LLC as the General Partner of UMT Home Finance, LP; |
| · | assignment of general partner distributions by UMT HF GP MANAGER, LP as the General Partner of UMT Residential Home Finance, L.P.; |
| · | assignment by UMTH Land Development, L.P. (“UMTHLD”) of all loan origination and servicing fees payable to UMTHLD with respect to construction loans originated by UMTHLD in which loans the Obligors take an invested interest; and |
| · | assignment by UMTHGS of all advisory and debt placement fees payable to it under the Advisory Agreement dated effective January 1, 2009 between UMT and UMTHGS. |
Application of the proceeds from foreclosure upon the security on the modified notes will be applied to the outstanding indebtedness of the various affiliates in a specified order of priority as described in the summary of security provided below.
The assignments of fees and assignments of limited and general partnership distributions are respectively essentially identical, for each assignee except as regards the entity involved, specific fees and the number of units being assigned. Forms of those assignments are included in the exhibits to our Report on Form 8-K filed on March 30, 2015.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2014 was performed by the Company’s Principal Executive Officer and Principal Financial Officer. Based on such evaluation, management has concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
The Company does not control the financial reporting process, and is solely dependent on UMTHGS, its Advisor, which is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Advisor’s disclosure controls and procedures were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Management’s Annual Report on Internal Control over Financial Reporting
The management of UMTHGS, the Company’s Advisor, is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2014. The internal control process of UMTHGS, as is applicable to the Company, was designed to provide reasonable assurance to management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
| 1. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of management, and |
| 2. | 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 consolidated financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of its internal control over financial reporting, as is applicable to the Company, as of December 31, 2014. In making this assessment, it used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. Based on its assessment, management concluded that the Advisor’s internal control over financial reporting, as is applicable to the Company, was effective as of December 31, 2014.
The Company is a “smaller reporting company” for the 2014 fiscal year. Accordingly, the Company’s independent registered public accounting firm is not currently required to issue an audit report on the Company’s internal control over financial reporting.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter of 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We do not have any direct employees. The services of our President and Chief Financial Officer, Mr. Ducote, are retained through a consulting agreement. The Trustees are responsible for the overall management and control of the Company’s business. The Advisor manages the day-to-day operations and the Company has retained the Advisor to use its best efforts to seek out and present to management suitable and a sufficient number of investment opportunities that are consistent with the Company’s investment policies and objectives.
The Company’s Declaration of Trust provides for not less than three or more than nine trustees, a majority of which must be independent Trustees, except for a period of 60 days after the death, removal or resignation of an independent Trustee. Each Trustee serves for a one-year term. There are currently five trustees, all of which are independent Trustees.
THE COMPANY’S TRUSTEES AND OFFICERS
The Company’s trustees and officers are as follows:
| Name | Age | Offices Held | ||
| T. Stuart Ducote | 68 | President and Chief Financial Officer | ||
| Michele A. Cadwell | 63 | Independent Trustee | ||
| Charles M. Gillis | 65 | Independent Trustee | ||
| Phillip K. Marshall | 65 | Independent Trustee | ||
| Roger C. Wadsworth | 67 | Independent Trustee | ||
| Leslie J. Wylie | 63 | Independent Trustee |
Stuart Ducote became President and Chief Financial Officer of United Mortgage Trust on July 29, 2009. As our only elected executive officer, he has served as our principal executive, principal accounting officer and principal financial officer since 2009. Mr. Ducote has served as the Chief Executive and Chief Financial Officer of numerous public and privately held companies. From 2006 through 2008, he was the co-owner of Ultra Realty, a privately held company involved with the acquisition, rehabilitation and development of residential properties and residential / commercial brokerage. From 2003 – 2006, he served as Chief Financial Officer for Humitech International Group, Inc., a rapidly growing international franchise operation, where he was responsible for systems implementation, franchisee contracts, all regulatory matters, debt financing to acquire mining operations and oversight of facilities operations. From 2001 – 2003 he served as Chief Financial Officer of People Solutions, Inc., where he structured the company in preparation for a capital raise and merger activity. From 1997 – 2000, he was the Chief Financial Officer of Jobs.Com, an Internet-based recruiting and on-line job marketing company, where he raised over $110 million in venture capital, built national brand recognition and positioned the company for an initial public offering. From 1994 – 1997 he served as a Trustee, Chief Executive and Chief Financial Officer for a private family trust and related operating companies, where he had oversight responsibilities for operating companies in the oil and gas, manufacturing, real estate acquisition and development, and power generation industries. From 1980 – 1994, he served as Chief Executive and Chief Financial Officer of Provident Bancorp of Texas, Inc., where he directed the formation, acquisition, and operation of numerous financial institutions, and successfully merged banks into a multi-bank holding company. Prior to 1984, Mr. Ducote worked in public accounting for approximately twelve years. He is a graduate of the University of Texas.
Michele A. Cadwell has been one of the Company’s independent trustees since August 1997. She was a fee attorney for Commonwealth Land Title of Dallas, Texas, from 1999 until May, 2006, when she returned to private practice as an attorney for the oil and gas industry. From 1998 to 1999, Ms. Cadwell was Manager – Onshore Land Operations with EEX Corp. Her primary responsibilities included drafting and negotiating exploration and marketing agreements, analysis of legislation and regulatory proposals, researching complex mineral titles, organization and management of non-core property divestitures, settlement of land owner disputes and advising and testifying on matters before the Oklahoma Corporation Commission. From 1980 until 1998 she was employed with Enserch Exploration, Inc. as Senior Land Representative. Ms. Cadwell is a 1974 graduate of the University of Oklahoma with a Bachelors of Arts Degree in English and a Juris Doctor Degree in 1978. She is admitted to both the Oklahoma and Texas bars. Ms. Cadwell is a member of the Investment Committee, Business Model Committee, and Liquidity Committee.
Charles M. Gillis has served as an independent trustee of the Company since April 2008. He is an attorney who has been in private practice since 1978. From 1988 through 2000, Mr. Gillis was a partner in the law firm of Gillis & Slogar. From 2000 through the present, Mr. Gillis is a partner at the law firm of Gillis, Paris & Heinrich, PLLC in Houston, Texas. Mr. Gillis practices in the area of Federal income tax with an emphasis on real estate, mergers and acquisitions and international taxation. Mr. Gillis has been an expert witness in legal matters involving Federal income tax and securities. Mr. Gillis is a 1971 graduate of the University of California at Los Angeles, a 1974 graduate of Bates College of Law, University of Houston (and a member of its honor society) and a 1975 Masters of Law (In Taxation) graduate of New York University. He is admitted to both the Texas and California bars. Mr. Gillis has been frequently listed in The Bar Register of Preeminent Lawyers published by Martindale-Hubbell.
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Phillip K. Marshall has served as one of the Company’s independent trustees since September, 2006. From May, 2007 to the present, Mr. Marshall has served as Chief Financial Officer of Rick’s Cabaret International, Inc., a publicly traded restaurant and entertainment company. From 2003 to May 2007, he has served as Chief Financial Officer of CDT Systems, Inc., a publicly-held company located in Addison, Texas that is engaged in water technology. From 2001 to 2003, he was a principal of Whitley Penn, independent certified public accountants. Prior to 2001, Mr. Marshall served as Director of Audit Services at Jackson & Rhodes PC and was previously an audit partner at Toombs, Hall and Foster and at KPMG Peat Marwick. Mr. Marshall received a BBA in Accounting, Texas State University in 1972. He is a Certified Public Accountant. Mr. Marshall is Chairman of the Audit Committee. Mr. Marshall is a member of the Audit Committee, Financial Reporting Committee, and Liquidity Committee.
Roger C. Wadsworth has served as one of the Company’s independent trustees since September 2006. Since 2003, he has served as the National Director and Board Member of The National Due Diligence Alliance, Inc., a non-profit trade association of Independent FINRA Broker-Dealer and Investment Advisory firms. From 2002 to 2014 he served as Chief Operating Officer of IMS Securities, Inc., a Financial Industry Regulatory Authority (“FINRA”) member firm. He holds FINRA Series 7, 24, 66 and 77 Licenses and is a licensed insurance agent in the State of Texas. From 1988 to 2002, he served as the Senior Vice President & Chief Administrative Officer of INVESTools, Inc. NASDAQ: SWIM (formerly Telescan, Inc.), a publicly-held company in the financial data, information, and analysis industry. INVESTools is now a part of TD AMERITRADE. Prior to 1988, he was the Co-Founder and Vice President of Information Management Services, Inc., a financial consulting and management firm. Mr. Wadsworth received a Bachelor of Business Administration in Finance from the University of Houston in 1971. Mr. Wadsworth is a member of the Investment Committee, Business Model Committee, and Audit Committee.
Leslie J. Wylie has served as an independent trustee of the Company since July 29, 2009. Ms. Wylie brings extensive experience in general corporate business and contractual matters, in the acquisition and divestiture of assets and in complex transactions to the Company’s board. Since 2006, she has served as Sr. Vice President and General Counsel for Trek Resources, Inc., a Dallas based oil and gas producer, where she is responsible for all legal, land and land administration functions. From 2003-2006, she was Vice president – Legal, Land and Regulatory for Crosstex Energy Services, LP, a mid-stream oil and gas company. Ms. Wylie has held land and legal managerial and/or officer positions with ENSERCH Corporation, EEX Corporation, PGS Reservoir Consultants, Inc. Hilcorp Energy Company, and various other oil and gas independents. She has been involved in the acquisition and divestiture of over 1.6 billion dollars of assets and has worked on several international projects for her employers. Ms. Wylie is licensed by the State Bars of Oklahoma and Texas, is a Certified Professional Landman and holds a B.A. degree from Oklahoma State University and a J.D. degree from the University of Tulsa College of Law.
THE ADVISOR
Effective on August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2013) the Company entered into an Advisory Agreement with UMTHGS (“Advisor”) to manage the Company’s affairs and to select the investments the Company purchases. The Advisor is controlled by UMT Services, Inc., the general partner of UMT Holdings, L.P. Todd F. Etter, Hollis M. Greenlaw and Michael K. Wilson are directors of UMT Services, Inc.
The directors and officers of UMT Services, Inc. and UMTHGS are set forth below.
| Name | Age | Offices Held | ||
| Todd F. Etter | 64 | Chairman and Director of UMT Services, Inc. | ||
| Hollis M. Greenlaw | 50 | Director and Chief Executive Officer of UMT Services, Inc. | ||
| Michael K. Wilson | 52 | Director of UMT Services, Inc. | ||
| David A. Hanson | 51 | President of UMTHGS and CFO of UMTH |
Todd F. Etter. Mr. Etter is a founding partner of UMT Holdings, LP (“UMTH”) and has served as director, partner and Chairman of UMT Services, Inc. the general partner of UMTH, UMTH General Services, LP (“UMTHGS”) and UMTH Land Development, LP (“UMTHLD”) and Executive Vice President of UMTHLD since March 2003. UMT Holdings, LP originates, purchases, sells, and services loans for the development of single-family lots and loans for the construction of single-family homes through its subsidiary UMTHLD. UMT Holdings, LP also provides real estate-related corporate finance services through its subsidiary UMTHGS. UMTHGS serves as the advisor to UDF IV and United Mortgage Trust. Mr. Etter serves as Chairman of the general partner of UDF I and UDF II and Executive Vice President of the general partner of UDF III, each of which are limited partnerships formed to originate, purchase, sell, and service land development loans and/or equity participations. Since 2000, Mr. Etter has been the Chairman of UMT Advisors, Inc., which served as the advisor to United Mortgage Trust from 2000 through July 31, 2006, and since 1996, he has been Chairman of Mortgage Trust Advisors, Inc., which served as the advisor to United Mortgage Trust from 1996 to 2000. Subsequent to the completion of the terms of their advisory agreements with United Mortgage Trust, neither UMT Advisors, Inc. nor Mortgage Trust Advisors, Inc. has been engaged in providing advisory services. Mr. Etter has overseen the growth of United Mortgage Trust from its inception in 1997 to over $160 million in capital. Since 1998, Mr. Etter has been a 50% owner of and has served as a director of Capital Reserve Corp. Since 2002, he has served as an owner and director of Ready America Funding Corp. Both Capital Reserve Corp. and Ready America Funding Corp. are Texas corporations that originate, sell, and service mortgage loans for the purchase, renovation, and construction of single-family homes. In 1992, Mr. Etter formed, and since that date has served as President of, South Central Mortgage, Inc. (“SCMI”), a Dallas, Texas-based mortgage banking firm. In July 2003, Mr. Etter consolidated his business interests in Capital Reserve Corp., Ready America Funding Corp. and SCMI into UMTH. From 1980 through 1987, Mr. Etter served as a Principal of South Central Securities, an NASD member firm. In 1985, he formed South Central Financial Group, Inc., a Dallas, Texas-based investment banking firm, and he continues to serve as its President; however, since 1992, South Central Financial Group, Inc. has not actively engaged in investment banking activities. From 1974 through 1981, he was Vice President of Crawford, Etter and Associates, a residential development, marketing, finance, and construction company. Mr. Etter received a Bachelor of Arts degree from Michigan State University in 1972.
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Hollis M. Greenlaw. Mr. Greenlaw has served as partner, Vice Chairman and Chief Executive Officer of UMT Holdings, L.P. (“UMTH”) and as President, Chief Executive Officer and a director of UMT Services, Inc. (“UMT Services”) since March 2003. He has also served as President and Chief Executive Officer of UMTH Land Development, L.P. (“UMTH LD”) since March 2003. Mr. Greenlaw is also the co-founder and Chief Executive Officer of UDF I, UDF II, and UDF III, affiliated real estate finance companies that provide custom financing and make opportunistic purchases of land for residential lot development and home construction. As Chief Executive Officer of the United Development Funding family of entities, Mr. Greenlaw has directed the funding of more than $1 billion in loans and equity investments through United Development Funding products, receiving more than $800 million in repayments to date, most notably through UDF III. From March 1997 until June 2003, Mr. Greenlaw served as Chairman, President, and Chief Executive Officer of a multi-family real estate development and management company owned primarily by The Hartnett Group, Ltd., a closely-held private investment company managing more than $40 million in assets. There he developed seven multi-family communities in Arizona, Texas, and Louisiana with a portfolio value exceeding $80 million. Prior to joining The Hartnett Group, Mr. Greenlaw was an attorney with the Washington, D.C. law firm, Williams & Connolly, where he practiced business and tax law. Mr. Greenlaw was a member of Phi Beta Kappa at Bowdoin College and received his Juris Doctorate from the Columbia University School of Law in 1990. Mr. Greenlaw is a member of the Maine, District of Columbia, and Texas bars.
Michael K. Wilson. Mr. Wilson has served as Executive Vice President and a director of UMT Services, Inc. since August 2005, President of UMTH since June 2009, and has been a partner of UMTH since January 2007. Mr. Wilson leads the marketing, sales, distribution and investor relations efforts for UMTH platform companies. From August 2005 through June 2009 Mr. Wilson served as President of UMTH Funding Services, where he was responsible for day-to-day distribution activities, including sales planning and execution, platform design and management, sales technology development and implementation. During his tenure Mr. Wilson directed the capital raise of over $330 million in United Development Funding securities through independent FINRA-member broker-dealers. From January 2004 through July 2005, Mr. Wilson served as Senior Vice President of Marketing for UMTH. From January 2003 through January 2004, Mr. Wilson served as Senior Vice President of Operations of Interelate, Inc., a marketing services business process outsourcing firm. From September 2001 to December 2002, Mr. Wilson was the sole principal of Applied Focus, LLC, an independent management consulting company that provided management consulting services to executives of private technology companies. Mr. Wilson continues to serve as a consultant for Applied Focus, LLC. From April 1998 to September 2001, Mr. Wilson served as Senior Director and Vice President of Matchlogic, the online database marketing division of Excite@Home, where he directed outsourced ad management and database marketing services for Global 500 clients. From July 1985 to April 1998, Mr. Wilson was employed with Electronic Data Systems in Detroit, Michigan where he led several multi-million dollar IT services engagements in the automotive industry. Mr. Wilson graduated from Oakland University in 1985 with a Bachelor of Science degree in Management Information Systems and earned a Master of Business Administration degree from Wayne State University in 1992. Mr. Wilson also attended the Thunderbird School of Global Management executive development program.
David A. Hanson. Mr. Hanson has served as President of UMTHGS since joining the company in June 2007. He also serves as Chief Financial Officer of UMT Holdings and UMT Services. Mr. Hanson has over 22 years of experience as a financial executive, principally in the in the residential housing industry and as an accountant with an international public accounting firm. From 2006 to 2007, he was a Director of Land Finance for the Central/Eastern Region at Meritage Homes Corporation (“Meritage”), the twelfth largest publicly-traded homebuilder. While at Meritage, Mr. Hanson handled all aspects of establishing, financing, administering and monitoring off-balance sheet FIN 46 compliant entities for the Central/Eastern Region. From 2001 to 2006, he was employed with Lennar Corporation, a national homebuilding company, serving in various capacities including Regional Finance Manager, acting homebuilding Division President, Regional Controller, and Controller for both homebuilding and land divisions. From 1999 to 2001, Mr. Hanson was the Director, Finance and Administration for One, Inc., a technology consulting firm. From 1996 to 1999, Mr. Hanson was the Vice President, Finance and Accounting for MedicalControl, Inc., a publicly-traded managed healthcare company. Prior to 1996, he was employed with Arthur Andersen LLP, an international accounting and consulting firm, for approximately nine years. He graduated from the University of Northern Iowa in 1984 with a Bachelor of Arts degree in Financial Management/Economics and in 1985 with a Bachelor of Arts degree in Accounting. He is a Certified Public Accountant and Certified Management Accountant.
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SUMMARY OF THE ADVISORY AGREEMENT
With the approval of the Company’s Trustees, including all of the independent Trustees, the Company entered into a contract with the Advisor (the “Advisory Agreement”) effective on January 1, 2013, under which the Advisor provides the Company with the Company’s day-to-day administrative services. In addition, the Advisor is obligated to use its best efforts to develop and present to management, whether through its own efforts or those of third parties retained by it, a sufficient number of suitable investment opportunities that are consistent with the Company’s investment policies and objectives as well as any investment programs that the trustees may adopt from time to time in conformity with the Declaration of Trust.
Although the Company’s trustees retain exclusive authority over the Company’s management, the conduct of the Company’s affairs and the management and disposition of the Company’s assets, the trustees have initially delegated to the Advisor, subject to the supervision and review of the trustees and consistent with the provisions of the Company’s Declaration of Trust, the following responsibilities:
| · | develop underwriting criteria and a model for the Company’s investment portfolio; |
| · | acquire, retain or sell the Company’s mortgage investments; |
| · | seek out, present and recommend investment opportunities consistent with the Company’s investment policies and objectives, and negotiate on the Company’s behalf with respect to potential investments or the disposition thereof; |
| · | pay the Company’s debts and fulfill the Company’s obligations, and handle, prosecute and settle any of the Company’s claims, including foreclosing and otherwise enforcing mortgages and other liens securing investments; |
| · | obtain such services as may be required by the Company for mortgage brokerage and servicing and other activities relating to the Company’s investment portfolio; |
| · | evaluate, structure and negotiate prepayments or sales of mortgage investments; |
| · | manage the structuring and registration of additional shares for the Company’s offering; |
| · | develop the Company’s administrative budget; |
| · | administer the Company’s day-to-day operations; |
| · | coordinate marketing and sales of the Company’s shares; |
| · | develop and maintain the Company’s web site; |
| · | administer the Company’s Share Redemption Plan and Dividend Reinvestment Plan; |
| · | coordinate engagement of market makers and listing of the Company’s shares at the appropriate time; |
| · | develop institutional and retail secondary market interest for the Company’s shares; |
| · | arrange the Company’s note warehousing credit facility and provide required financial guarantees; |
| · | negotiate the Company’s loan purchases; |
| · | develop and monitor the Company’s investment policies; |
| · | develop a high yield loan acquisition program; |
| · | oversee loan servicing for the Company’s portfolio; |
| · | oversee acquisition and disposition of the Company’s investments; |
| · | manage the Company’s assets; and from time to time, or as requested by the trustees, make reports to the Company regarding the Advisor's performance of the foregoing services. |
The Advisory Agreement had an initial term of one year and is subject to an annual evaluation of the performance of the Advisor by the trustees. The Advisory Agreement may be terminated (1) without cause by the Advisor or (2) with or without cause by a majority of the independent trustees. Termination under either of those provisions may be made without penalty and upon 60 days' prior written notice to the non-terminating party.
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The Advisor may engage in other business activities related to real estate, mortgage investments or other investments whether similar or dissimilar to those made by the Company or act as advisor to any other person or entity having investment policies whether similar or dissimilar to ours (including other REITs). Except for the allocation of investments between the Company and other affiliated programs as described in related party transactions, the officers and directors of the Advisor and all persons controlled by the Advisor and its officers and directors may take advantage of an opportunity for their own account or present or recommend it to others, however, they are obligated to present an investment opportunity to the Company if (1) that opportunity is of a character which could be taken by the Company, (2) that opportunity is compatible with the Company’s investment objectives and policies and (3) the Company has the financial resources to take advantage of that opportunity.
The Declaration of Trust provides that the independent trustees are to determine, at least annually, that the amount of compensation the Company pays the Advisor is reasonable in relation to the nature and quality of the services performed, based on the factors set forth in the Declaration of Trust and such other factors as they deem relevant, including the size of the fee in relation to the size, composition and profitability of the Company’s investment portfolio, the success of the Advisor in generating opportunities that meet the Company’s investment objectives, the rates charged to other REITs and to investors other than REITs by advisors performing similar services, the amount of additional revenues realized by the Advisor and its related parties for other services performed for the Company, the quality and extent of service and advice furnished by the Advisor, the performance of the Company’s investment portfolio and the quality of the Company’s investment portfolio in relationship to the investments generated by the Advisor for its own account.
The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by the Company) and (3) the cost of other items that generally fall under the category of the Advisor's overhead that is directly related to the performance of services for which it is otherwise receiving fees from the Company.
CODE OF ETHICS
The Company’s Board of Trustees has adopted a Code of Conduct and Business Ethics that is applicable to all trustees, officers and employees of the company. You may obtain a copy of this document free of charge by mailing a written request to: Investor Relations, United Mortgage Trust, 1301 Municipal Way, Suite 220, Grapevine, TX 76051. You may also access the Company’s Code of Conduct through the Company’s website: www.unitedmortgagetrust.com
ITEM 11. EXECUTIVE COMPENSATION
The Company has no direct employees. The Company’s operations are maintained by the Company’s Advisor, under the guidance of the Company’s Trustees. The services of our President and Chief Financial Officer, Mr. Ducote, are retained through a consulting agreement which pays him a monthly fee of $5,000.
Compensation of Trustees and Executives
Trustees who are not independent Trustees do not receive any compensation for acting as Trustees. During 2006 and prior, Independent trustees were entitled to receive the greater of $1,000 per meeting or a minimum of $15,000 per year. During 2007, Independent trustees were entitled to receive $1,000 per regular meeting or committee meeting attended. For each year in which they serve, each independent Trustee will also receive 5-year options to purchase 2,500 shares at an exercise price of $20 per share (not to exceed 12,500 shares per Trustee). In addition, independent trustees, serving prior to the Company’s merger termination have received compensation for their activities as part of the independent committee formed to evaluate and negotiate the proposed merger.
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The table below provides information on Trustee Compensation:
| Name/Year | Fees Earned | Stock Awarded | Value of Options Awarded if Exercised(3) | Non-Equity Incentive Plan Comp.(1) | Change in Pension Value and Non- Qualified Deferred Comp. Earnings (2) | All other Comp. | Total | |||||||||||||||||||||
| 2014 | ||||||||||||||||||||||||||||
| Stuart Ducote | — | — | — | — | — | $ | 60,000 | $ | 60,000 | |||||||||||||||||||
| Michele A. Cadwell | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Phillip K. Marshall | $ | 20,000 | — | — | — | — | — | $ | 20,000 | |||||||||||||||||||
| Roger C. Wadsworth | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Chuck Gillis | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Leslie Wylie | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| 2013 | ||||||||||||||||||||||||||||
| Stuart Ducote | — | — | — | — | — | $ | 60,000 | $ | 60,000 | |||||||||||||||||||
| Michele A. Cadwell | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Phillip K. Marshall | $ | 20,000 | — | — | — | — | — | $ | 20,000 | |||||||||||||||||||
| Roger C. Wadsworth | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Chuck Gillis | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Leslie Wylie | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| 2012 | ||||||||||||||||||||||||||||
| Stuart Ducote | — | — | — | — | — | $ | 60,000 | $ | 60,000 | |||||||||||||||||||
| Michele A. Cadwell | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Phillip K. Marshall | $ | 20,000 | — | — | — | — | — | $ | 20,000 | |||||||||||||||||||
| Roger C. Wadsworth | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Chuck Gillis | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| Leslie Wylie | $ | 16,000 | — | — | — | — | — | $ | 16,000 | |||||||||||||||||||
| (1) The Company does not have an incentive plan. |
| (2) The Company does not have a pension plan. |
| (3) All options are priced at the greater of the Company’s initial offering price of $20 per share or the then current market value and therefore carry no intrinsic value. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 2014 by each person who is known to the Company to be the beneficial owner of more than 5% of the Company’s shares and the beneficial ownership of all trustees and officers as a group as of such date.
| Name | Number of Shares (1) | Percent of Class | ||||||
| Michele A. Cadwell (2) | 12,500 | (3) | 0.19 | % | ||||
| Phillip K. Marshall (2) | 12,500 | (3) | 0.19 | % | ||||
| Roger C. Wadsworth (2) | 12,500 | (3) | 0.19 | % | ||||
| Chuck Gillis (2) | 12,500 | (3) | 0.19 | % | ||||
| Leslie Wylie (2) | 12,500 | (3) | 0.19 | % | ||||
| All Trustees and Executive Officers as a Group (5 persons) | 62,500 | (4) | 0.97 | % | ||||
| (1) | For purposes of this table, shares indicated as being owned beneficially include shares that the beneficial owner has the right to acquire within 60 days of March 1, 2015. For the purpose of computing the percentage of the outstanding shares owned by a shareholder, shares that may be acquired during the 60 days following March 1, 2015 are deemed to be outstanding securities of the class owned by that shareholder but are not deemed to be outstanding for the purpose of computing the percentage by any other person. |
| (2) | A trustee and/or executive officer of the Company. The address of all trustees and officers is c/o United Mortgage Trust, 1301 Municipal Way, Suite 220, Grapevine, TX 76051, telephone (214) 237-9305 or (800)955-7917, facsimile (214) 237-9304. |
| (3) | Includes shares issuable upon the exercise of stock options at an exercise price of $20.00 per share. |
| (4) | Includes the shares described in footnote (3) above. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Receivables
As a component of its real estate investment activities the Company has, since inception in 1997 regularly made Mortgage Investments in the form of loans to related parties which were secured by loans originated by related parties to nonrelated third parties. In addition, the Company has purchased loans originated by affiliates to nonrelated third parties.
Related Party Relationships
The following chart depicts the related parties with which we have loan or recourse relationships:
The related party relationships depicted above are more fully described below:
| · | UMT Holdings, L.P. (“UMTH”) is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in: |
| o | UMTH Lending Company, LP which made interim mortgage loans to non-related third parties; |
| o | UMTH General Services, L.P. (“UMTHGS”) which serves as advisor to the Company and; |
| o | UMTH Land Development, L.P. (“UMTHLD”) which serves as asset manager to United Development Funding, L.P. (“UDF”). |
| · | UMTH Lending Company, L.P. (“UMTHLC”) is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC secured by interim mortgage loans for the acquisition and renovation of single-family homes made by UMTHLC to non-related third parties borrowers. |
| · | UMTH Land Development, L.P., (“UMTHLD”), is a Delaware limited partnership and subsidiary of UMTH which serves as asset manager for and holds a 50% profit interest in United Development Funding, L.P. (“UDF”), a Delaware limited partnership. UMTHLD also serves as general partner of United Development Funding III, L.P. (“UDF III”). |
| · | United Development Funding, L.P. (“UDF”), a Delaware limited partnership which originates loans and makes investments for the acquisition and development of parcels of real property as single-family residential lots. UMTHLD serves as the asset manager of UDF. The Company has extended a revolving line of credit facility to UDF which is secured by all of UDF’s senior and subordinate real estate secured loans and equity investments. |
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| · | United Development Funding III, L.P., a Delaware limited partnership, (“UDF III”). UMTHLD serves as general partner of UDF III. UDF III .has purchased an economic participation in a revolving credit facility we have provided to UDF. |
| · | Capital Reserve Group (“CRG”) is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which holds a 99.9% interest in UMTHGS, our advisor. The Company has loaned money to CRG secured by interim mortgage loans for the acquisition and renovation of single-family homes made by CRG to nonrelated third parties borrowers. |
| · | Ready America Funding Corp. (“RAFC”) is a Texas corporation that is 50% owned by South Central Mortgage, Incorporated (“SCMI”), a company owned by Todd Etter and 50% beneficially owned by Craig Pettit, a partner in UMTH. The Company has loaned money to RAFC secured by interim mortgage loans secured by land and modular and manufactured single-family homes placed on the land made by RAFC to non-related third party borrowers. |
| · | SCMI, a Texas corporation. The Company has purchased long term owner-occupied residential mortgage loans from SCMI secured by single-family homes. |
| · | Wonder Funding, LP (“Wonder”) is a Delaware limited partnership that is owned by Ready Mortgage Corporation (“RMC”). RMC is beneficially owned by Craig Pettit, a partner of UMTH. The Company has loaned money to Wonder secured by interim mortgage loans for the acquisition and renovation of single-family homes made by Wonder to non-related third party borrowers. |
The following table details the governance and ownership aspects of above related party relationships:
| United Mortgage Trust Related Party Relationships | ||||||
| Company | Affiliation | Governance | Ownership | |||
| UMT Holdings, L.P. ("UMTH") | 99.9% owner of our borrower, UMTHLC and our advisor, UMTHGS | UMT Services, Inc. serves as General Partner | 10 Limited Partners | |||
| UMTH Lending Company, L.P. ("UMTHLC") | Borrower | UMT Services, Inc. serves as General Partner | 99.9% owned by UMTH | |||
| UMTH Land Development, L.P. ("UMTHLD") | Asset Manager for UDF I and General Partner of UDF III | UMT Services, Inc. serves as General Partner | 99.9% owned by UMTH | |||
| United Development Funding, L.P. ("UDF I") | Borrower | United Development Funding, Inc., serves as General Partner | 41 Limited Partners | |||
| United Development Funding III, L.P. ("UDF III") | Loan Participant | UMTHLD serves as General Partner | 9003 Limited Partners | |||
| Capital Reserve Group, Inc. ("CRG") | Borrower | 2 UMTH Limited Partners serve as directors | Owned by 2 UMTH Limited Partners | |||
| Ready America Funding Corp. ("RAFC") | Borrower | 2 UMTH Limited Partners serve as directors | Beneficially owned by 2 UMTH Limited Partners | |||
| South Central Mortgage, Inc. ("SCMI") | Note Seller | One UMTH Limited Partner serves as director | Beneficially owned by 1 UMTH Limited Partner | |||
| Wonder Funding, L.P. ("Wonder") | Borrower | One UMTH Limited Partner serves as director | Beneficially owned by 1 UMTH Limited Partner | |||
Note - None of the Company’s Trustees or officers hold a direct or beneficial interest in any of the above related parties.
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Related Party Receivables
The following table summarizes our related party loans and obligations and corresponding outstanding balances as of December 31, 2014 and 2013. The amounts shown in the table below are included in the consolidated balance sheets.
| 2014 | 2013 | Collateral | ||||||||
| Interim loans, related parties | ||||||||||
| RAFC | $ | 5,830,254 | $ | 6,282,339 | Real estate | |||||
| Total | 15,830,254 | 16,282,339 | ||||||||
| Lines of credit receivable, related parties | ||||||||||
| UDF I | $ | 8,580,538 | $ | 7,739,415 | Land development loans and equity investments | |||||
| UDFI (UDF III economic interest participation agreement) | 74,686,618 | 70,835,104 | Land development loans and equity investments | |||||||
| UMTHLC | 7,576,966 | 7,576,966 | Real estate | |||||||
| Total | $ | 90,844,122 | $ | 86,151,485 | ||||||
| Recourse obligations, related parties | ||||||||||
| CRG | $ | 4,504,044 | $ | 4,504,544 | Pledge of equity interest & limited guaranty | |||||
| RAFC | 10,267,408 | 10,170,196 | Pledge of equity interest & limited guaranty | |||||||
| SCMI | 3,448,002 | 3,448,002 | Pledge of equity interest & limited guaranty | |||||||
| RAFC/Wonder | 1,971,536 | 1,971,536 | Pledge of equity interest & limited guaranty | |||||||
| Total | $ | 20,190,990 | $ | 20,094,278 | ||||||
| Deficiency note, related party | ||||||||||
| UMTHLC | $ | 28,739,855 | $ | 29,295,567 | Guaranty | |||||
The following is a brief description of the Company’s related party receivables, by type, and related collateral.
Interim Loans, related parties
The Company has loaned money to UMTHLC and RAFC secured by Interim Loans for the acquisition and renovation of single-family homes made by UMTHLC and RAF to non-related third party borrowers. These loans are collaterally assigned to the Company as security for the Interim Loans between UMTHLC and RAFC and the Company. These loan balances are included in “Interim loans, related parties” in the Company’s consolidated balance sheets.
Lines of Credit, related parties – UDF, UDF III and UMTH LC
UDF and UDF III
The Company has entered into a revolving line of credit with UDF, secured by the pledge of all of UDF's land development senior and subordinated real estate secured loans and equity investments.
The Company has entered into an Economic Interest Participation Agreement with UDF III, pursuant to which UDF III purchased an economic interest in the UDF revolving line of credit (“Loan”) and was granted an option to acquire a full ownership participation interest in the Loan. The advances funded by UDF III are exactly offset by a participation payable amount to UDF III; therefore the Company does not earn any net interest income on the advances made by UDF III and has no net collectability exposure under the Economic Interest Participation Agreement.
The above loan balances are included in “Lines of credit receivable, related parties” in the Company’s consolidated balance sheets.
UMTHLC
The Company has entered into a secured line of credit promissory note with UMTHLC in the amount of $8,000,000. The line of credit is secured by first lien mortgage interests in single family residential properties.
These loan balances are included in “Lines of credit receivable, related parties” in the Company’s consolidated balance sheets.
Recourse Obligations, related parties
CRG, RAFC, and Wonder, made Interim Loans to non-related third party borrowers for the acquisition and renovation of single-family homes. The Company made loans, with recourse, to each of these entities. Each of these entities used the proceeds from such loans to originate loans to non-related third party borrowers, which are referred to as "underlying loans," that are pledged to the Company as security for the Company’s loans made to them. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed to the Company is also due in full.
In addition to the loans made, with recourse, to CRG, RAFC, and Wonder, the Company purchased long term Residential Mortgage loans from SCMI referred to as "purchased loans," and entered into recourse agreements under which SCMI agreed to repay certain losses the Company incurred with respect to the purchased loans by delivering an unsecured deficiency note in the amount of the deficiency to the Company.
All amounts due from each related party under the recourse obligations and deficiency notes described above have been consolidated into secured promissory notes (“Recourse Obligations”). The security for the Recourse Obligations consists of a pledge of each related party’s respective Class C and Class D ownership units in UMTH and in the case of Wonder secured by a limited indemnification agreement between UMTH and the Company. This collateral represents capital shares in UMTH and is eligible for, and receives, quarterly distributions from UMTH. See “Management’s Collectability Analysis for Related Party Recourse Obligations and Deficiency Notes” below for management’s valuation of collateral securing the related party obligations.
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Based upon the collectability analysis performed by it, the Company has concluded that the guarantors have the ability to perform their obligations under the guaranties and that the Recourse Obligations are fully realizable.
These Recourse Obligation balances are included in “Recourse obligations, related parties” in the Company’s consolidated balance sheets.
Deficiency Note, Related Party
As noted above, the Company has loaned money to UMTHLC to fund the origination of Interim Loans to their borrowers. If UMTHLC or the Company forecloses on a property securing an Interim Loan, and the proceeds from the sale are insufficient to pay the loan in full, UMTHLC delivers an unsecured deficiency note in the amount of the deficiency to the Company. In 2007, UMTHLC issued to the Company a promissory note to evidence its deficiency obligations to the Company (the “Deficiency Note”). The Deficiency Note is secured by a limited guaranty by UMTHGS, the Advisor. This Deficiency Note balance is included in “Deficiency note, related party” in the Company’s consolidated balance sheets.
1) UMTH is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTHLC, which originates Interim Loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in UDF and acts as UDF's asset manager, and PSC, which services the Company’s Residential Mortgages and contracts for deed and manages the Company’s real estate owned (“REO”). In addition, UMTH has a limited guarantee of the obligations of CRG, RAFC, and SCMI, a Texas corporation that sold Mortgage Investments to the Company, under the Secured Notes. UDF III which is managed by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit and has purchased an economic participation in a revolving credit facility we have provided to UDF.
2) UMTHLC is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC so it can make loans to its borrowers. The loans are collaterally assigned to the Company, as security for the promissory note between UMTHLC and the Company.
On March 26, 2009, the Company executed a secured line of credit promissory note with UMTHLC in the amount of $8,000,000. The note bears interest at 12.50% per annum, matured on September 26, 2012 and is secured by first lien mortgage interests in single family residential properties. The Company is negotiating an extension of this loan with UMTHLC with similar terms. The outstanding balance on this line of credit at December 31, 2014 and December 31, 2013 was approximately $7,577,000 for both periods, respectively, and is included in the balances noted in the paragraph above.
3) CRG is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which owns the Advisor. CRG was in the business of financing home purchases and renovations by real estate investors. The Company loaned money to CRG to make loans to other borrowers. During 2006 the Company took direct assignment of the remaining loans from CRG with full recourse.
4) RAFC is a Texas corporation that is 50% owned by SCMI, which is owned by Todd Etter. RAFC is in the business of financing Interim Loans for the purchase of land and the construction of modular and manufactured single-family homes placed on the land by real estate investors. The Company continues to directly fund obligations under one existing RAFC loan, which was collaterally assigned to the Company, but does not fund new originations. The unpaid principal balance of the loans at December 31, 2014 and 2013, was approximately $15,830,000 and $16,282,000, respectively.
5) Wonder Funding, LP (“Wonder”) is a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit. Wonder is in the business of financing Interim Loans for the purchase of land and the construction of single family homes. The Company has ceased funding any new originations. As of December 31, 2013, all remaining obligations owed by Wonder to the Company are included in the recourse obligations discussed below.
6) Recourse Obligations. The Company has made recourse loans to (a) CRG, which is owned by Todd Etter and William Lowe, (b) RAFC, which is owned by SCMI and two companies owned by Craig Pettit, Eastern Intercorp, Inc. and Ready Mortgage Corp. (“RMC”), and (c) SCMI, which is owned by Todd Etter, (these companies are referred to as the "originating companies"). In addition to the originating companies discussed above, the Company made loans with recourse to Wonder. Each of these entities used the proceeds from such loans to originate loans, that are referred to as "underlying loans," that are pledged to the Company as security for such originating company's obligations to the Company. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.
In addition, some of the originating companies have sold loans to the Company, referred to as the "purchased loans," and entered into recourse agreements under which the originating company agreed to repay certain losses the Company incurred with respect to purchased loans.
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If the originating company forecloses on property securing an underlying loan, or the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering an unsecured deficiency note in the amount of the deficiency to the Company.
On March 30, 2006, but effective December 31, 2005, the Company and each originating company agreed to consolidate (1) all outstanding amounts owed by such originating company to the Company under the loans made by the Company to the originating company and under the deficiency notes described above and (2) the estimated maximum future liability to the Company under the recourse arrangements described above, into secured promissory notes. Each originating company issued to the Company a secured variable amount promissory note dated December 31, 2005 (the “Secured Notes”) in the principal amounts shown below, which amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to increase up to the maximum amounts shown below if the Company incurs losses upon the foreclosure of loans covered by recourse arrangements with the originating company. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on the Class C and Class D units of limited partnership interest of UMT Holdings held by each originating company.
See Note N Subsequent Events for additional information regarding the Deficiency Note receivable from UMTHLC and the Recourse Obligations, related party.
Management’s Collectability Analysis for Related Party Recourse Obligations and Deficiency Notes
Recourse Obligations and Deficiency Notes are resultant from a shortfall in the repayment of an underlying loan securing a loan to a related party or in the shortfall in repayment from a defaulted and foreclosed Residential Mortgages purchased from a related party. In both cases, the Company has recourse to the related party for the shortfall. Unlike the original underlying loan or purchased mortgage, the related party’s recourse obligation is not secured by a lien on a real property. Recourse Obligations of CRG, RAFC, SCMI and Wonder are secured by the pledge of equity interests held in UMTH. The UMTHLC Deficiency Note is secured by the guaranty of UMTHLC and the limited guaranty of UMTHGS including pledge of up to 33% of the advisory fee received by UMTHGS. Because the obligations are secured by third party collateral and guarantees, management conducts quarterly analysis of the integrity and value of the security for each obligation, and makes a determination of the collectability of the obligations based on the collateral value and cash flows derived from the collateral.
In making these loans, we considered a number of factors to preserve and enhance our ability to be repaid. The security for the Recourse Obligations of CRG, RAFC and SCMI consists of pledges of each related party’s respective Class C and Class D ownership units in UMTH. This collateral represents capital shares in UMTH and is eligible for, and receives, quarterly distributions from UMTH. Class C units are entitled to a total distribution of $1,000 per unit and the value of the C unit collateral is determined through multiplying the number of pledged units remaining times $1,000. Class D units are entitled to perpetual distributions and are valued using a discounted cash flow (“DCF”) model that is reviewed and updated each quarter. The integrity of the C and D unit collateral is determined by the distribution priority given to each unit by the UMTH general partner and the reliability of forecasted distributions. Security for the Recourse Obligation of Wonder consists of a limited indemnification agreement in the initial amount of $1,134,000. The table below depicts the remaining collateral value securing the Recourse Obligations at December 31, 2014.
| Name | Initial principal amount | Balance at December 31, 2014 | Promissory Note principal amount (2) | Units pledged as security | C Units distributed during 2014 | Units remaining | Estimated Collateral Value (3) | |||||||||||||||||
| CRG | $ | 2,725,442 | $ | 4,504,044 | $ | 4,300,000 | 4,984 Class C and 2,710 Class D | 19 | 2,380 Class C and 2,710 Class D | $ | 5,027,000 | |||||||||||||
| RAFC | $ | 3,243,369 | $ | 10,267,408 | $ | 7,100,000 | 11,228Class C, 6,659 Class D | 68 | 8,626 Class C and 6,659 Class D | $ | 10,560,000 | |||||||||||||
| SCMI | $ | 3,295,422 | $ | 3,448,002 | $ | 3,488,643 | 4,545 Class C and 3,000 Class D | 8 | 977 Class C and 3,000 Class D | $ | 3,656,000 | |||||||||||||
| RAFC / Wonder(1) | $ | 1,348,464 | $ | 1,971,536 | $ | 1,400,000 | 1,657 Class C | 12 | 1,470 Class C | $ | 1,471,000 | |||||||||||||
| Wonder Indemnification (1) | n/a | n/a | n/a | $1,134,000 | - | n/a | $ | 822,000 | ||||||||||||||||
| Totals | $ | 10,612,697 | $ | 20,190,990 | $ | 16,288,643 | $ | 21,536,000 | ||||||||||||||||
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| (1) | Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation. |
| (2) | The CRG, RAFC and Wonder balances at December 31, 2014 exceeded the stated principal amount per their variable Secured Notes by approximately $204,000, $3,167,000 and $572,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) than we originally anticipated and outpaced the minimum principal reductions scheduled for the loans. |
| (3) | Estimated collateral value reflects pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions |
Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC, and RAFC/Wonder Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or (2) the amount of any distributions paid to the originating company with respect to the pledged Class C units. Effective October 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, modify the amortization schedules for the period of July 2007 through June 2009, and reduce the interest rate from 10% to 6%. The above modifications have been extended through December 31, 2014. Management has accounted for these as loan modifications in the normal course of business, and not as a troubled debt restructuring, as the underlying collateral value exceeds the outstanding loan amounts, the modifications did not include an extension of the debt’s original contractual maturity or expected duration, the borrowers and guarantors have obtained third party financing at current market rates, the modified rate represents a premium over current market rates and the risk characteristics of the third party debt obtained is similar to the modifies debt. The Company expects to receive full repayment under the loan.
Cash Flow Analysis
The obligors’ ability to perform is principally dependent upon the forecasted cash distributions associated with the pledged collateral and the ability of the distributions to meet the debt service requirements under the Recourse Obligations. On a quarterly basis, the Company conducts a review of the collateral pledged by the underlying borrowers and third party guarantors in order to assess their ability to perform their obligations under the terms of the Recourse Obligations. This review includes analyzing the consolidated financial statements of UMT Holdings, L.P. including its cash flows and sources of cash flow, assets and net profits. In addition to reviewing the historical financial statements, we analyze projected future earnings and cash flows that will support distributions and validate the assumptions used to generate these projections, assessing the ability to execute on the business plan, conducting discussions with and obtaining representations from the guarantors’ management with respect to their current and projected distribution amounts. Management reviews near-term (1 year) and long-term (5 years) distribution forecasts associated with the UMTH Class C and D units, cash flow from the indemnification agreement, cash flow from UMTHGS advisory fees and cash flow to UMTHLC to determine if the forecasted cash flows are sufficient to meet the obligations. The available cash flow from UMTH, as shown in the Historical Performance table below, indicates sufficient cash flow from the guarantors to service the Recourse Obligations and the Deficiency Note. In addition to the above mentioned collateral, the Company has a guaranty limited to a maximum of $10,582,336 from UMTH of all amounts due under the Recourse Obligations. At December 31, 2014, the remaining balance of the limited guaranty was approximately $1,665,000.
The UMTHLC Deficiency Note is secured by the guaranty of UMTHLC and the limited guaranty of UMTHGS including pledge of up to 33% of the advisory fee received by UMTHGS. The value of both the UMTHLC guarantee and the UMTHGS limited guarantee is determined by the cash flow associated with either UMTHLC or the amount of advisory fees earned by UMTHGS.
On a quarterly basis, the Company conducts a review of the collateral pledged by the underlying borrowers and third party guarantors in order to assess their ability to perform their obligations under the terms of the Recourse Obligations. The collateral pledged consists of class C and class D ownership units of UMT Holdings, L.P. These units represent capital shares in UMT Holdings, L.P. and are eligible for, and receive, quarterly distributions from UMT Holdings, L.P. Such ability to perform is principally dependent upon the forecasted cash distributions associated with the pledged collateral and the ability of the distributions to meet the debt service requirements under the Secured Notes. The review includes analyzing projected future distribution sources and amounts, validating the assumptions used to generate such projections, assessing the ability to execute on the business plan, conducting discussions with and obtaining representations from the guarantors’ management with respect to their current and projected distribution amounts. The value of the pledged collateral is estimated using a discounted cash flow model that is reviewed and updated each quarter. Based on such reviews, the Company has concluded that the guarantors have the ability to perform under their repayment obligations and that the Recourse Obligations are fully realizable. Accordingly, the Company has not recorded any reserves on these loans.
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The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:
| - | UMT Holdings. This guaranty was limited to a maximum of $10,582,336 of all amounts due under the Secured Notes. At December 31, 2014, the remaining balance of the limited guaranty was approximately $1,665,000. |
| - | WLL, Ltd., a related party of CRG. This guaranty is of all amounts due under Secured Note from CRG, is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd. |
| - | RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings. |
| - | Wonder. Wonder Funding obligations are evidenced by a note from RAFC (RAFC/Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above. |
| - | SCMI. This guaranty is limited to a maximum of $2,213,000 due under the Secured Note from RAFC and is secured by an assignment of 2,213 Class C units of limited partnership interest of UMT Holdings. |
| - | KLA, Ltd. KLA has given the following limited guaranties: (1) Guaranty of obligations of SCMI under the First Amended and Restated Secured Variable Amount Promissory Note to the Company dated as of October 1, 2007 with a then current principal balance of $3,472,073 and is secured by an assignment of 3,000 of Guarantor’s Class D units of partnership interest in UMT Holdings, L.P. (2) Guaranty of obligations of CRG under the First Amended and Restated Secured Variable Amount Promissory Note dated as of October 1, 2007 with a then current principal balance of $4,053,799 and is secured by a pledge of 1,355 of Guarantor’s Class D units of partnership interest in UMTH. |
In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made to William Lowe by UMT Holdings. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to the Company to secure its guaranty of Capital Reserve Corp.'s obligations under its Secured Note, UMT Holdings and the Company entered into an Intercreditor and Subordination Agreement under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to the Company’s lien on such units.
Historical Performance
Management also considers historical cash flows and payment history to make an assessment of the collectability of the obligations. The table below depicts the historical cash flows for each obligor and the payment history under its obligation for the years ended December 31, 2014, 2013 and 2012. To date, the obligors have met all of their financial obligations to the Company.
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Obligor | Cash Flow | Payments | Cash Flow | Payments | Cash Flow | Payments | ||||||||||||||||||
| UMTH (1),(3) | $ | (253,834 | ) | $ | 1,105,158 | $ | 15,592,306 | $ | 3,492,500 | $ | 12,842,083 | $ | 2,813,601 | |||||||||||
| UDF I (1),(4) | $ | 7,911,149 | $ | - | $ | 10,785,187 | $ | - | $ | 11,728,909 | $ | - | ||||||||||||
| CRG (2) | $ | 22,766 | $ | 22,766 | $ | 172,884 | $ | 172,884 | $ | 171,641 | $ | 171,641 | ||||||||||||
| RAFC (2) | $ | 77,585 | $ | 77,585 | $ | 589,816 | $ | 589,816 | $ | 583,796 | $ | 583,796 | ||||||||||||
| SCMI (2) | $ | 12,077 | $ | 12,077 | $ | 91,833 | $ | 91,833 | $ | 390,343 | $ | 90,343 | ||||||||||||
| Wonder (2) | $ | 11,569 | $ | 11,569 | $ | 87,957 | $ | 87,957 | $ | 86,556 | $ | 86,556 | ||||||||||||
(1) Audited.
(2) Unaudited.
(3) Represents available cash flow for debt service and distributions. UMTH generates cash flow that is used to service the UMTHLC Deficiency Note and the Recourse obligations.
(4) Represents principal payment proceeds received by UDF I from its borrowers. These receipts are the sources used by UDF to repay its line of credit payable to the Company.
Based on its review of the quality and integrity of the security, the forecasted cash flows and the historical performance of each obligor, management has determined the cash flows of the obligor to be sufficient to meet the terms of the Recourse Obligations and Deficiency Notes.
These loans were reviewed by management and no reserves on principal amounts are deemed necessary at December 31, 2014 or 2013.
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7) On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note as modified by an amendment effective September 1, 2006 (the "Amendment") with UDF; a Nevada limited partnership that is a related party with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects. On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
The Loan is secured by the pledge of all of UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”). Those UDF loans may be first lien loans or subordinate loans.
The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%. Effective October 1, 2013, the loan was extended to December 31, 2014 and the base interest rate was decreased to a rate of 9.25%. Effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.
On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”). On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2012, the loan was extended for a period of one year and matures on December 31, 2013, and the loan amount was increased from $75,000,000 to $82,000,000. Effective September 30, 2014, the line of credit was increased from $82,000,000 to $84,674,672 and effective December 31, 2014, the line of credit was extended and matures on December 31, 2015.
Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.
The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. At December 31, 2014 and 2013 UDF III had outstanding approximately $83,267,000 and $78,575,000, respectively, to UDF under this agreement of which approximately $74,687,000 and $70,835,000 were outstanding under the Economic Interest Participation Agreement at December 31, 2014 and 2013, respectively.
On June 21, 2010, UDF entered into a new promissory note agreement with a private investor, the proceeds from which were used to pay off the Textron loan agreement in full. Pursuant with this transaction, the Company entered into a second amendment to our subordination and intercreditor agreement which subordinates the UMT loan to the new loan from the private investor, reducing the amount subject to subordination from $30,000,000 to $15,000,000.
The following table summarizes the lines of credit receivable, related parties, as of December 31, 2014 and 2013:
| 2014 | 2013 | |||||||
| UDF I | $ | 8,580,000 | $ | 7,739,000 | ||||
| UDF I (UDF III Economic Interest Participation Agreement) | 74,687,000 | 70,835,000 | ||||||
| UMTH LC | 7,577,000 | 7,577,000 | ||||||
| Balance, end of year | $ | 90,844,000 | $ | 86,151,000 | ||||
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8) Loans made to related parties of the Advisor. Below is a table of the aggregate principal amount of mortgages funded each year indicated, from the companies which are related parties with the Advisor, and named in the table and aggregate amount of draws made by UDF under the line of credit, during the three years indicated:
| Related Party Company | 2014 | 2013 | ||||||
| UMTHLC | $ | - | $ | 15,000 | ||||
| UDF | $ | 841,000 | $ | 1,053,000 | ||||
9) As of August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2013) the Company entered into an Advisory Agreement with UMTHGS. Under the terms of the agreement, UMTHGS is paid a monthly trust administration fee. The fee is calculated monthly depending on the Company’s annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month, however, our Advisor has limited the annual trust administration fee to the lesser of i) 1% of our average invested assets, or ii) $1,000,000. During 2014, 2013, and 2012 the expenses for the Company’s Advisor were approximately $1,000,000, respectively, and actual payments made were approximately $1,000,000, $1,125,000, and $731,000, respectively. The Advisor and its related parties are also entitled to reimbursement of costs of goods, materials and services obtained from non-related third parties for the Company’s benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for the Company or to dispose of any of its investments. The Company paid the Advisor $78,000, $76,000, and $76,000 as reimbursement for costs associated with providing shareholder relations activities during 2014, 2013, and 2012.
The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which the Company’s net income for a year exceeds a 10% per annum non-compounded cumulative return on its adjusted contributions. No incentive fee was paid during 2014 or 2013. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 Shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2014 and 2013, the Advisor has not received options to purchase shares under this arrangement.
The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from the Company.
The Advisory Agreement also provides for the Company to pay to the Advisor, or a related party of the Advisor, a debt placement fee. The Company may engage the Advisor, or a related party of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit. The Company paid debt placement fees of approximately $150,000 in August 2013, respectively, to a related party of the Advisor. These fees are amortized monthly, as an adjustment to interest expense, over the term of the credit facility agreements described in Note D. The Company amortized (expensed) approximately $71,000, $52,000 and $42,000 of these fees in 2014, 2013, and 2012, respectively.
10) The Company pays loan servicing fees to PSC, a subsidiary of UMTH, under the terms of a Mortgage Servicing Agreement. The Company paid loan servicing fees of approximately $1,000 $5,000, and $19,000, during 2014, 2013, and 2012, respectively.
11) The Company pays “guarantee” credit enhancement fees to UDF III, related party of PSC and UDF, as specified under the terms of the UDF Guarantee agreement. In 2014, 2013, and 2012, the Company made cash payments in the amount of $104,000, $78,000, and $66,000 as compensation of said guarantee fees. In 2014, 2013 and 2012, the related credit enhancement expenses were $114,000, $77,000, and $109,000, respectively.
12) Related parties United Development Funding Land Opportunity Fund, L.P., a Delaware limited partnership, (“UDF LOF”), UDF IV and UDF X, are reimbursed for their degree of invested “participatory” interest in the Company’s construction loans, the degree of invested interest is not to succeed $2,000,000. The Company made payments of such participation interest, as a net amount against the construction loan interest, in 2014, 2013, and 2012, in the amounts of $2,260,000, $791,000, and $1,719,000, respectively.
13) The Company pays UMTH LD, administrative and origination fees, for the construction loans in which UDF related parties take an invested interest in. The fees are withheld from construction draws funded to the borrower, and are in turn paid directly to UMTH LD. In 2014, 2013, and 2012, payments were made for the above administrative and origination fees in the amounts of $188,000, $201,000, and $161,000, respectively.
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The chart below summarizes the approximate payments associated with related parties for the twelve months ended December 31, 2014, 2013, and 2012:
| Related Party Payments: | ||||||||||||||||||||||||||
| For Twelve Months Ended | ||||||||||||||||||||||||||
| Payee | Purpose | December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| UMTHGS | Trust administration fees | $ | 1,000,000 | 93 | % | $ | 1,125,000 | 93 | % | $ | 731,000 | 91 | % | |||||||||||||
| UMTHGS | General & administrative - Shareholder Relations | 78,000 | 7 | % | 86,000 | 7 | % | 76,000 | 9 | % | ||||||||||||||||
| $ | 1,078,000 | 100 | % | $ | 1,211,000 | 100 | % | $ | 807,000 | 100 | % | |||||||||||||||
| PSC | Loan Servicing Fee | $ | 1,000 | 7 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||
| PSC | General & Administrative – Misc. | 14,000 | 93 | % | - | 0 | % | - | 0 | % | ||||||||||||||||
| $ | 15,000 | 100 | % | $ | 2,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||||
| UMTH | Debt Placement Fees | - | - | 150,000 | 100 | % | - | - | ||||||||||||||||||
| UDF III | Credit Enhancement Fees | 104,000 | 100 | % | 78,000 | 100 | % | 66,000 | 100 | % | ||||||||||||||||
| UDF IV | Participation Interest Paid | 2,260,000 | 100 | % | 791,000 | 100 | % | 1,696,000 | 100 | % | ||||||||||||||||
| UDF X | Participation Interest Paid | - | - | - | - | 23,000 | 100 | % | ||||||||||||||||||
| UMTH LD | Admin and Origination Fees Paid | 188,000 | 100 | % | 201,000 | 100 | % | 161,000 | 100 | % | ||||||||||||||||
The chart below summarizes the approximate expenses associated with related parties for the twelve months ended December 31, 2014, 2013 and 2012:
| Related Party Expenses: | ||||||||||||||||||||||||||
| For Twelve Months Ended | ||||||||||||||||||||||||||
| Payee | Purpose | December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| UMTHGS | Trust administration fees | $ | 1,000,000 | 93 | % | $ | 1,000,000 | 93 | % | $ | 1,000,000 | 93 | % | |||||||||||||
| UMTHGS | General & administrative - Shareholder Relations | 76,000 | 7 | % | 76,000 | 7 | % | 76,000 | 7 | % | ||||||||||||||||
| UMTHGS | General & administrative –Misc. | 1,000 | 0 | % | 1,000 | 0 | % | 2,000 | 0 | % | ||||||||||||||||
| $ | 1,077,000 | 100 | % | $ | 1,077,000 | 100 | % | $ | 1,078,000 | 100 | % | |||||||||||||||
| PSC | Loan Servicing Fee | $ | 1,000 | 7 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||
| PSC | General & Administrative – Misc. | 14,000 | 93 | % | - | - | - | - | ||||||||||||||||||
| $ | 15,000 | 100 | % | $ | 5,000 | 100 | % | $ | 19,000 | 100 | % | |||||||||||||||
| UMTH | Debt Placement Fees | 71,000 | 100 | % | 52,000 | 100 | % | 42,000 | 100 | % | ||||||||||||||||
| UDF III | Credit Enhancement Fees | 114,000 | 100 | % | 77,000 | 100 | % | 109,000 | 100 | % | ||||||||||||||||
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Whitley Penn LLP has served as the Company’s independent registered public accounting firm since July 2002. The Board of Trustees approves all audit, non-audit, tax and other fees payable to the Company’s auditors.
The following table reflects fees incurred to Whitley Penn LLP for services rendered to the Company in 2014, 2013 and 2012:
| Nature of Service | 2014 | 2013 | 2012 | Purpose | ||||||||||
| Audit fees | $ | 141,000 | $ | 197,000 | $ | 204,000 | For audit of the Company’s annual financial statements, review of Quarterly financial statements included in the Company’s Forms 10-Q and review of other SEC filings | |||||||
| Tax fees | $ | 8,750 | $ | 10,300 | $ | 11,500 | For preparation of tax returns and tax compliance | |||||||
| All other fees | -- | -- | -- | |||||||||||
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed:
(1) Financial Statements of the Company are included in Item 8.
(2) Financial Statement Schedules – all schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto included in Item 8.
(3) Exhibits. See the Exhibit Index following this Annual Report for a list of the exhibits that are filed as part of this report.
(b) See Item 15(a)(3)
(c) Separate Financial Statements of related parties. See Exhibit Index. Financial statements of UMT Holdings, L.P. (exhibit 99.1) and financial statements of United Development Funding, L.P. (exhibit 99.2).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2015.
| UNITED MORTGAGE TRUST | ||
| By: | /S/STUART DUCOTE | |
| Stuart Ducote, President and Chief Financial Officer | ||
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /S/CHARLES M. GILLIS | Independent Trustee | March 31, 2015 | ||
| Charles M. Gillis | ||||
| /S/MICHELE A. CADWELL | Independent Trustee | March 31, 2015 | ||
| Michele A. Cadwell | ||||
| /S/PHILLIP K. MARSHALL | Independent Trustee | March 31, 2015 | ||
| Phillip K. Marshall | ||||
| /S/ROGER C. WADSWORTH | Independent Trustee | March 31, 2015 | ||
| Roger C. Wadsworth | ||||
| /S/LESLIE J. WYLIE | Independent Trustee | March 31, 2015 | ||
| Leslie J. Wylie |
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| Exhibit Number | Description | |
| 3.1 | Form of Second Amended and Restated Declaration of Trust | * |
| 3.2 | Bylaws of the Company | * |
| 3.3 | Consulting Agreement between the Company and Stuart Ducote | |
| 4.1 | Form of certificate representing the shares [of common stock/beneficial interest] | |
| 4.2 | Dividend Reinvestment Plan (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on March 19, 2009). | |
| 4.3 | Description of Share Repurchase Program (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on March 19, 2009) | |
| 4.4 | Amended Share Redemption Plan and Dividend Reinvestment Plan (filed as Exhibit 99.1 to Form 8-K filed June 1, 2010 and incorporated herein by reference) | |
| 4.5 | Amended Dividend Reinvestment Plan (filed as Exhibit 99.1 to Form 8-K filed March 3, 2015 and incorporated herein by reference) | |
| 10.1 | Advisory Agreement dated August 14, 2006 between the Company and UMTH General Services, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed August 16, 2006) | |
| 10.5 | Form of Mortgage Servicing Agreement between the Company and South Central Mortgage, Inc., at a later date assigned to Prospect Service Corp. | * |
| 10.8 | Fourth Amendment to Revolving Loan Agreement dated November 8, 2004 between the Company and Texas Capital Bank, N.A. together with Promissory Note and Amended and Restated Guaranty (incorporated by reference from the Company’s Current Report on Form 8-K/A filed August 2, 2006.) | |
| 10.9 | Second Amended Secured Line of Credit Promissory Note and Security Agreement between the Company and United Development Funding, L.P. dated June 20, 2006 (incorporated by reference from the Company’s Current Report on Form 8-K filed June 21, 2006) | |
| 10.10 | Subordination Agreement between the Company and Textron Financial Corporation dated as of June 14, 2006 incorporated by Reference from the Company’s Current Report on Form 8-K filed June 21, 2006) | |
| 10.11 | Secured Variable Amount Promissory Note dated December 31, 2005 issued by Capital Reserve Group, Inc. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.12 | Secured Variable Amount Promissory Note dated December 31, 2005 issued by South Central Mortgage, Inc. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.13 | Secured Variable Amount Promissory Note dated December 31, 2005 issued by Ready America Funding Corp. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.14 | Form of Assignment of Limited Partnership Interest as Collateral Dated December 31, 2005 between the Company and Capital Reserve Group, Inc., South Central Mortgage, Inc., Ready America Funding Corp. and WLL, L.P. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.15 | Guaranty dated December 31, 2005 between the Company and Ready Mortgage Corp. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.16 | Guaranty dated December 31, 2005 between the Company and WLL, L.P. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.17 | Guaranty dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.18 | Intercreditor and Subordination Agreement dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from the Company’s Current Report on Form 10-K filed March 31, 2006) | |
| 10.19 | Loan Modification Agreement dated January 1, 2015 between the Company and UMTH Lending Company, L.P., Capital Reserve Group, Inc., South Central Mortgage, Inc., Ready America Funding Corp. and WLL, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 30, 2015) | |
| 21.1 | Subsidiaries of the Registrant (filed herewith) | |
| 23.1 | Consent of Independent Registered Public Accounting Firm (filed herewith) | |
| 23.2 | Consent of Independent Registered Public Accounting Firm relating to the financial statements of UMT Holdings, L.P. (filed herewith) | |
| 23.3 | Consent of Independent Registered Public Accounting Firm relating to the financial statements of United Development Funding, L.P. (filed herewith) | |
| 31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith) | |
| 32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith) | |
| 99.1 | Financial Statements of UMT Holdings, L.P. | |
| 99.2 | Financial Statements of United Development Funding, L.P. |
| 101.INS** | XBRL Instance Document (furnished herewith) |
| 101.SCH** | XBRL Taxonomy Extension Schema Document (furnished herewith) |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith) |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document (furnished herewith) |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith) |
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The exhibits marked with “*” are incorporated by reference from the Company's Registration Statement on Form S-11 (File No. 333-10109) that was declared effective on March 5, 1997. The exhibit marked with “**” is incorporated by reference from the Company's registration statement on Form S-11 (File No. 333-56520) that was declared effective on June 4, 2001. The exhibit marked “***” is incorporated by reference from the Company’s Report on Form 10-K for the period ending December 31, 2000. The exhibit marked “#” is incorporated by reference from the Company’s Report on Form 10-Q for the period ending June 30, 2001. The Exhibit marked “##” is incorporated by reference from the Company’s Report on Form 10-K for the period ending December 31, 2004.
** Filed herewith.
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