SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report
(Date of Earliest Event Reported):
April 15, 2005
UNITED MORTGAGE TRUST
(Exact Name of Registrant as Specified in its
Governing Instruments)
(a Maryland trust)
Commission File Number 333-10109
(IRS Employer Identification)Number 75-6496585)
5740 Prospect Avenue
Suite 1000
Dallas, Texas 75206
(address of principal executive offices)
Registrant's telephone number,
including area code: (214) 237-9305
<Page>
Item 7.01 Regulation FD Disclosure
CONFIDENTIAL - FOR BROKER INFORMATION PURPOSES ONLY
United Mortgage Trust Update
April 15, 2005
To: Broker / Dealers and Registered Representatives
From: Todd Etter, Chairman, UMT Advisors, Inc.
The following is a status report for United Mortgage Trust. Because the report
is lengthy we have inserted an Executive Summary. Please refer to the titled
sections for more detail. Most of the information reported below is also
included in our 2004 10-K filing and will be incorporated in our Annual Report
to be issued later this month.
This report is confidential and intended for broker/dealers and registered
representatives only. It is not to be disseminated to any other persons without
our prior written permission.
Executive Summary
At year-end 2004 we had made 88 consecutive monthly distributions. Earnings in
2004 were an 8.15% return on equity, and a 6.7% return on original investment.
Earnings were impacted by aggressive liquidation of foreclosed real estate and
significant cash bank balances earning at money market rates. Earnings during
2005 are projected to exceed 2004 due to portfolio diversification, lower cash
bank balances and greater use of leverage.
Throughout 2004 we diversified our investment portfolio through the
securitization and sale of long-term loans, expansion of investment in interim
loans and focused investment in loans secured by residential lot developments.
At year end 2004, approximately 13.7% of our assets were investments in
long-term single-family home loans, 57.08% of our assets were investments in
interim loans and 22.3% of our assets were investments in loans secured by
residential lot developments.
In January 2005 we completed a second securitization and sale of long-term
loans, with the purposes of increasing the yield of those types of loans by 3%
and redeploying the cash proceeds in interim loans and development loans that
have higher yields than long-term loans.
During 2003 and 2004, our aggressive liquidation of foreclosed real estate made
available approximately $1.5 million of sales proceeds for reinvestment,
converting non-income producing assets into income producing assets. During
2005 we instituted a loss mitigation policy and our loan servicer has employed
a REO Manager to institute a loss mitigation policy designed to reduce
foreclosure and maximize our recovery from the sale of foreclosed properties.
Our distribution rate for 2004 averaged 8.6% of invested capital, and our
current distribution rate is 8.0% and will be reviewed by our Trustees with
2005 first quarter results when they will set the dividend rate for the second
quarter of 2005.
We will be required to suspend our share repurchase program with the merger
announcement with UMT Holdings, L. P., likely to take place during the second
quarter of 2005. We intend to reinstitute a share repurchase program or
similar liquidity program after conclusion of the merger, estimated to be
third quarter 2005.
The audit of our financial reporting practices cited weakness in our practices
as legislated by Sarbanes-Oxley Rules. New financial reporting rules have
resulted in additional workload and expense for the Company as we instituted
new policies and procedure for 2005. Be assured though that the accuracy of
our financial reporting was not in question and has been attested to by our
auditors.
We expect to announce our intent to merge with UMT Holdings, L. P. in the
second quarter 2005 and hope to conclude the merger by the end of the third
quarter 2005. The merger terms proposed will fix the rate of return for our
shareholders at 8.5% and provide expanded liquidity.
Detailed Analysis
This analysis includes the following:
Section I: 2004 Earnings
Section II: Repositioning of Assets
Section III: Securitization of Long-term Loans
Section IV: Sale of Real Estate Owned ('REO')
Section V: Distribution Rate
Section VI: Share Repurchase Program
Section VII: Sarbanes, Oxley ('SOX') Reporting
Section VIII: Merger Status
I. 2004 Earnings
Through diversification of our loan portfolio we have continued to achieve
higher yields from our investments. 2004 Gross Income was $13,889,448 or $1.97
per share. Our aggressive policy towards the liquidation of foreclosed real
estate, (see Sale of REO, section IV below), resulted in $1,800,000 of loan
losses for 2004, or $.26 per share. More demanding accounting practices, (see
SOX Reporting, section VII below), required an additional $921,000 in loan loss
reserve or $.13 per share. In addition, high cash bank balances adversely
impacted our earnings. The average daily cash balance was approximately
$4,518,000. The cash was deposited in a money market or money fund account and
earned between 1% and 2%. Our Net Income was $9,466,008 or $1.34 per share,
equaling an 8.15% return on equity, and a 6.7% return on original investment.
Due to our reduced inventory of foreclosed properties, we can be less
aggressive when liquidating our real estate owned ('REO') in 2005, (see
Sale of REO, section IV below). In addition, we have refined our loss
analysis method and have reserved in 2004 what we believe is an adequate
amount to cover 2005 losses from the sale of foreclosed properties securing
our long-term loan portfolio.
In addition, we will continue to reserve during 2005 for loan losses associated
with interim mortgage loans.
With what we have stated above, we anticipate that our earnings in
2005 to exceed 2004.
II. Repositioning of Assets
We continue to shift to a portfolio weighted to interim mortgages and loans
secured by residential lot developments because:
1) suitable interim mortgage and land development loan investments are
available to us on an exclusive basis through our affiliates;
2) interim mortgage loans and land development loans have demonstrated less
risk and as a result we have not experienced as significant losses due to
default;
3) blended yields have been higher for the two categories which should
positively affect earnings.
As of December 31, 2004, our interim and long-term mortgage loan portfolio,
totaled $94,390,000, consisting of 545 residential mortgages, 9 contracts for
deed and 945 interim mortgages. The average loan in the portfolio had a
blended interest rate of 13.11%, a current annual yield of 13.24%, an
investment-to-value ratio of 71.17%, and an average unpaid principal balance
of $63,000. At December 31, 2004 interim loans comprised 57.08% of our assets
and long-term mortgage loans comprised 13.7% of our assets.
Throughout 2004 we increased our investment in loans secured by residential lot
developments through our affiliate United Development Funding, ('UDF'). As of
December 31, 2004, our land development loan portfolio totaled $28,722,000.
Ourinvestment in land development loans is senior to approximately $15,000,000
in UDF equity and diversified with more than 20 loans throughout major Texas
residential markets. We received interest income ranging from 12% to 15% from
our land development loan investments throughout 2004. Since its formation in
2003 UDF has funded $100,000,000 of loans and received $46,000,000 of loan
payoffs.
Currently we are receiving an average of 14.1% on our land development loans.
At December 31, 2004 land development loans comprised 22.3% of our assets.
We have increased our bank line of credit from $10,000,000 to $15,000,000 to
fund the growth of our investment portfolio. With the repositioning of our
assets, (see Repositioning of Assets, section II below), and the growth in
suitable interim loans available to us, we expect to minimize our uninvested
cash and maximize the use of our credit facility.
III. Securitization of Long-term Loans
The yield on the majority of our long-term residential loans has been increased
through the securitization and sale of approximately 78% or our long-term loan
portfolio. In April of 2004 and again in January of 2005, we securitized and
sold two pools of loans, an aggregate of $22,000,000 of our long-term loans.
As a part of the securitization we received approximately $16,500,000 in cash,
retained approximately $5,500,000 in subordinate mortgage interests yielding
approximately 11.6% and realize additional mortgage interest income of
approximately 2.3% on the senior interests. The yield increased on the
subordinate mortgage interests from 11.6% to 18.5%. We were able to reinvest
the sale proceeds, approximating $16,500,000 into higher yielding mortgage
loans. Through prudent management, we believe we have appropriately utilized
capital markets to effectively preserve the integrity of the yield on our
long-term loan assets.
IV. Sale of Real Estate Owned, ('REO')
During 2003 and 2004 we sold a significant number of foreclosed properties
continuing our aggressive program of liquidation of non-incoming producing
assets. We realized losses in 2004 and 2003 of approximately $1,867,000, and
$1,822,000 respectively, a 2% increase between periods.
We began 2004 with 72 foreclosed long-term loan properties and foreclosed an
additional 50 loans during the year, down 40% from the prior year. We sold 98
properties in 2004 leaving a year-end REO inventory of 24 properties, a 66%
reduction over the prior year inventory, marking the end of our aggressive
liquidation policy. We began 2004 with 25 foreclosed interim loan properties;
we foreclosed 29 throughout the year and sold 31 leaving 23 interim fore-
closures at year end. Defaults as a percentage of total income producing
properties for 2004 was 3.20%, down 25% from the prior year.
The resultant short-term impact to earnings will be supported over time by
the redeployment of sale proceeds into income producing loans. We realized
approximately $1,512,000 from the 2003 and 2004 REO sale proceeds into interim
mortgages and land development loans.
Our present REO management policies, based on our reduced REO inventory, are
focused on loss mitigation and maximum recovery from sale of foreclosed
properties. We believe our actions represent the best long-term course for
maximizing the yield on our portfolio.
V. Distribution Rate
Distributions for the year ended December 31, 2004 were made at a rate of 8.6%
reflective of a 9.2% rate for the first six months of the year and 8.0% for the
last six months of the year. The dividend portion of the distribution in 2004
was $1.34 per weighted share equaling an 8.15% return on equity, and a 6.7%
return on original investment. We distributed $2,657,856 or $.38 per share in
excess of earnings in 2004, bringing cumulative distributions on excess of
earnings to $6,386,352 or $.91 per share, (approximately 4.5% of original share
price). Our Trustees have established a dividend target approximating 90% of
our earnings per share and intend to cease distributions in excess of
earnings.
Our current distribution rate is 8.0% and will be reviewed by our Trustees in
the second quarter of 2005 and, based on our estimated earnings rate, our
distribution may be modified.
VI. Share Repurchase Program
We repurchased 199,541 shares in 2004 at an average price of $19.49 per share
or 97.45% of the original per share price. Since inception we have repurchased
642,307 shares at an average price of $19.74 per share or 98.7% of the original
share price. Shares held less than 12 months were subject to repurchase at a
discount. We continue to repurchase shares monthly in an amount not to exceed
the greater of our dividend reinvestment amount or $83,333 per month.
Currently we have 210,410 shares tendered for repurchase.
Under applicable securities laws, we will be required to suspend the share
repurchase program upon the announcement of our pending merger (see Merger
Status, section VIII below). A share repurchase program will commence
following the completion of the shareholder merger vote anticipated to occur
in the third quarter of 2005.
VII. Sarbanes-Oxley ('SOX') Reporting
2004 was our first year reporting under Sarbanes-Oxley Rules, ('SOX'). Our
auditors conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that they plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects.
Our auditors identified four material weaknesses as of December 31, 2004; 1) we
lacked segregation of duties, as we have since inception because Cricket
Griffin performs all accounting functions, 2) we did not have documented
policies and procedures for financial reporting, 3) Cricket Griffin is not a
degreed accountant and, as such, does not possess accounting and financial
reporting knowledge and experience 4) we did not properly analyze and record
loan loss reserves.
During the eight years that Cricket Griffin has functioned as our only
accounting personnel, we have produced audited financial statements to which
our auditors have attested without reservation. In the years prior to
Sarbanes-Oxley our financial statements, disclosures or results of operations
have been produced in accordance with GAAP rules and our auditors have opined
to their accuracy. In the last two years we have developed and reassessed
loss reserves and our methodology relating thereto and we are satisfied, as
are our auditors, that our reserves and methodology are now adequate.
SOX requires that all public companies operate under a more demanding public
reporting standard and we have resolved to incur the additional expense and
workload to address the weaknesses identified by our auditors and will
endeavor to fully comply with the new SOX internal control and reporting
requirements.
VIII. Merger Status
In November 2003, we received a merger proposal from an entity organized by
persons that include officers and owners of UMT Holdings, L. P. and UMT
Advisors, Inc. In response to the proposal, our Board of Trustees formed a
special committee and retained legal and financial experts to assist in
evaluating the proposal.
The special committee has concluded its negotiations and deliberations, and is
expected to make a recommendation to the full Board of Trustees supporting the
transaction upon receipt of a fairness opinion from its advisor Southwest
Securities. Southwest Securities is prepared to issue the fairness opinion
after review of UMT and UMTH 2004 year end financial statements. UMT
financials are complete and UMTH financials are expected by April 30, 2005.
Under the current proposal, each holder of our shares of beneficial interest at
the time of the closing of the merger would receive a 10-year Class A Debenture
having an original principal amount of $20 for each share owned by such holder
and an annual interest rate of 8.5%, which interest shall be payable monthly.
Following the Board of Trustees approval, UMTH will file a registration
statement with the Securities and Exchange Commission to permit the submission
of the merger to a vote of the Company's shareholders. We anticipate an
effective date for the registration statement by early third quarter 2005 and
the proxy solicitation to be completed within 60 days of the effective date. A
vote in favor by at least 80 % of the UMT shareholders will be required to
effect the merger.
Benefits of the merger include:
The merger of UMT and UMT Holding, L. P. brings into one entity the
loan origination and capital components.
UMTH limited partnership structure would allow for conducting a trade
or business, notably origination of real estate secured loans, prohibited
under the Real Estate Investment Trust structure while continuing to benefit
from the single tax structure.
United Mortgage Trust effectively captures the Interim origination
companies which it is currently dependent upon for loan production thereby
ensuring the continuity and longevity of the UMT business investment model.
Economies of scale in combining underwriting, origination, servicing
and administrative functions of seven separate lending platforms into one.
Eliminating the need to rely on the capital markets for Interim loan
originations eliminating competitive influences on loan production.
United Mortgage Trust, under the REIT structure is restricted in its
use of leverage. In today's low interest rate environment UMT is challenged
to maintain its historic yield without greater use of lower cost funds.
Under the UMTH structure UMT expands its ability to purchase
alternative real estate secured assets allowing for diversification in
investment structure necessary to ensure UMT's capital is fully and
prudently invested.
UMTH Series A Debenture offers a fixed rate of return in lieu of a
dividend determined by current earnings.
UMTH Qualified Repurchase Plan offers increased liquidity for
investors.
UMTH offers a Payment Reinvestment Plan allowing for continuing
participation by investors.
A senior security position for UMT shareholders.
UMTH capital structure offers increased payment coverage ratios by
effectively subordinating loan originating companies' profits to the
Class A Debenture obligations.
A five year premium for early redemption of Class A Debentures.
Elimination of UMT Trust advisory function and UMT capital sourcing
function and related burden.
Greater economies in entity administration, shareholder relations,
public reporting and transfer agent functions.
Continued benefit of a public reporting company.
Conclusion
Over the last eight years we have recognized changes in the residential real
estate finance industry, managed our business to adapt to the industry changes
and rewarded our investors with attractive yields. We have moved our
investment focus from long-term sub-prime residential real estate loans to
short-term, lower loan-to-value interim loans and further to short-term
residential lot development loans. In accordance with the changes in our
method of operation, we have proposed a new entity structure designed to
ensure the longevity of our investment model. We remain confident of our
direction to maximize performance of our investment portfolio and look forward
to accomplishing all we have planned for 2005. We thank you for your continued
support.
<page>
SIGNATURES Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
UNITED MORTGAGE TRUST
April 15, 2005 /S/Christine A. Griffin
Christine A. Griffin
President