UMH Properties, a small cap REIT that owns and operates manufactured home communities, may be one of the most consistent dividend paying stocks in our REIT roster, but their dividends have not been covered by funds from operations (FFO) for the past six years. With the release of Q4 results last week, FFO figures have not been encouraging, prompting a discussion when they will cover their dividends. Nevertheless, hopes have been high and investors have been optimistic. Shares rose by 7% last week.
For the full year of 2015, UMH had a significant dividend shortfall of approximately 25%, since normalized FFO reached $0.55, as opposed to an annual dividend of $0.72. They have issued debt and equity to cover the deficit and have maintained a dividend yield of 7%, the highest in the sector of manufactured homes and top 20% among equity REITs.
I see advantages in a potential dividend cut. If they reduced the dividend to $0.55, the yield would be 5.3%, which is still above the equity REIT average. Also, they would finally stop financing distributions. But a dividend cut seems unlikely because they may be afraid to send investors a wrong message. Investors could interpret the cut as a sign of weak perspectives.
Manufactured home sector has proven to be a good sector to invest, and I don’t have doubts that the success of its peers has affected UMH positively. UMH’s larger peers, Equity LifeStyle Properties and Sun Communities had great results last year, with total returns north of 17%. Even UMH fared well, with a total return above 10%. FFO multiples have also been high, especially for Equity LifeStyle, which is trading at 24x.
The company’s Achilles’ heel is that their communities are concentrated in the Marcellus and Utica shale regions (Ohio and Pennsylvania). Management has not been concerned, though. They argued that, despite low energy prices, pipeline construction to reach end-consumers and gas processing plant construction have driven industrial development in the regions.
In summary, although I see the manufactured home sector positively, I can’t disregard UMH’s uncovered dividend and its dependency on the energy industry, so I’d not invest in this stock right now.
Summary of the Week
As companies continue to release Q4 results, it has been another good week for equity REIT stocks, which returned an average of 1.1%. Most sectors have returned positively, with the exception of lodging. Several lodging stocks have occupied bottom positions in our weekly ranking. Data center and timber have been the highlights of the week.
Source:Equity LifeStyle Properties, I(NYSE:ELS), Sun Communities Inc.(NYSE:SUI), UMH Properties Inc.(NYSE:UMH), Fast Graphs.
Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on March 11, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.
As of February 29, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.
This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.
Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.