This Manufactured Home REIT Should Have Cut Dividend

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Check the reports for Dividend Yield by Sector and Weekly Returns.

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.

Check the reports for Dividend Yield by Sector and Weekly Returns.

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.

The Exact Opposite of What Investors Expect From a REIT

chart01First Potomac Realty Trust is the exact opposite of what investors expect from a REIT. After all, investors like REITs because of their slightly increasing dividends and growing funds from operations per share. However, First Potomac has been the opposite of this epitome. First Potomac, an office REIT focused on Washington DC, has decreased its dividends and Core FFO per share since the Great Recession of 2008/09.

Slashing dividends is never good news. Even with a dividend payout ratio to AFFO around 80%, First Potomac decreased its annualized dividend from $0.60 to $0.40 this February, alleging this move will save $12 million. This is a representative cut. Although the company is projecting flat FFO per share in 2016, the company appears to be bracing itself for a potential steep dive in funds from operations.

Indeed, management rated almost half of its square footage as either non-core or as market/sold. In February, they released a presentation in which they projected that between the second half of 2016 and the entire year of 2017, net operating income could be cut between 20-25% following the sale of those assets and purchase of new ones.

If you’re a hopeful First Potomac shareholder, I would definitely review my expectations because rough times are ahead for you, while First Potomac shrinks. Last month, when I featured the Bethesda, Maryland based REIT, the company had welcomed a new CEO. At that time, I mentioned the company appeared to be drifting and needed to find a clear direction. While I welcome a strategic plan, they will keep shrinking their portfolio.

Over the past five years, First Potomac decreased in size from 13 to 8 million square feet. Another significant size reduction makes me wonder when things will finally look up for First Potomac. The company will use the proceeds of the sale to reduce debt, strengthen balance sheets, repurchase stocks, and reduce corporate expenses. As a result, they see themselves having a reduced level of NOI and debt in 2019.

The bright side of this asset reduction is that they must have chosen the right assets to sell. While occupancy in DC has decreased, occupancy at First Potomac has increased. This means they have identified what is working, verified if there are similar potential assets in the portfolio that could do as well (repositioning), and set aside those that are not working. Unfortunately, for First Potomac, this exercise has proven to be painful and lasting for shareholders.

Over the past five years, their share price decreased by 42%. Their current share price is 30% below its 52 week high and its AFFO multiple is just under 10x, which indicates their stock in undervalued.

When it comes right down to it, all I see right now is reduction, so I’m not interested in First Potomac for now.

Source: First Potomac Realty Trust (NYSE: FPO)

Disclaimer: This newsletter 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. Please do your own due diligence before making any investment decision. 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.

U.S. REITs: Longest Dividend-Paying Stocks — Lexington Realty Trust

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Several reasons have led us to believe that Lexington Realty Trust, a net lease REIT mostly in Office/Industrial, has become a good, reliable purchase for dividend lovers. First, it is part of the group of most consistent dividend-paying REIT stocks (not many REITs have distributed dividends for 22 years in a row). Second, it has a dividend yield above the equity REIT average of 8.1%. Finally, it looks undervalued if compared to its closest peers, including office, industrial and net lease REITs.

From its first dividend in January 1994, Lexington never interrupted the distribution of quarterly dividends. Such consistency can be one of the most obvious signs that management has been committed to its shareholders. Since it went public in 1993, the company is the result of several mergers. Regardless, 22 years of consecutive dividends is a very good track record, even though they slashed dividends in 2008 to accelerate the deleveraging of the company and paid dividends mostly in shares in 2009.

chart02A potential risk to its dividend record is an ambitious plan to make over its portfolio. With between $600 – $700 million of dispositions planned for 2016, including a sale of New York City land, the FFO per share in 2016 will reduce to $1.05, as opposed to $1.10 in 2015. However, if everything works as planned, we doubt the company will have any issues in maintaining the current level of dividends. Its current payout ratio is conservative, just around 60%.

chart03The good thing about this plan is that management will mitigate another potential threat to dividends by reducing the leverage level. In Q4, they posted a higher than average debt level of 57% of the capital structure. Although some would argue that an environment of low interest rates is a good time to maximize debt levels, still you don’t want to threaten the company’s liquidity level. Since the dispositions’ proceeds will serve various purposes — to pay down debt, acquire properties that fit their objectives, and repurchase stocks — we believe that the new debt level will not go down beyond 50%.

chart04Lexington management has been skillful in maintaining a resilient portfolio. The company has been moving away from Office and has increased its exposure to Industrial properties. Also, a significant part of the revenues is now sourced from long-term leases, a likely consequence of investing in build-to-suit and sale-leaseback, single-tenant properties. In the end, they enjoy a portfolio that is diversified and well balanced in terms of expirations.

chart05The company valuation metrics indicate they are undervalued. In terms of dividend yield, the company tops any industrial REITs with its 8.1%. Compared with Office REITs, the company would have the third highest yield, after Government Properties and Select Income. Its AFFO multiple is lower than most peers.

It is natural that a non-pure play REIT such as Lexington usually looks undervalued because it is harder to compare. The dual nature of the company, especially during a transitional period, makes some investors step back; but during periods like this is when savvy investors make good purchases.

In summary, I’d buy Lexington for its dividend consistency and few threats to this record. The portfolio transition is long term and represents a potential upside to the stock.

Source: Lexington Realty Trust(NYSE:LXP)

Disclaimer: This newsletter 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. Please do your own due diligence before making any investment decision. 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.

Speculative REIT Stocks Jump Again

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CHECK THE REPORTS FOR DIVIDEND YIELD BY SECTOR AND WEEKLY RETURNS.

It was another great week for equity REITs this week as more than 85% of the stocks rose. Though January and February were bad months (January worse than February according to FTSE NAREIT All Equity REITs Index) last week was very encouraging with the stocks we track rising by 4.1%. There have been winning streaks for a few weeks in a row yet that could be ruined by another increase in interest rates.

It is no surprise at all that the most volatile stocks are back as the top performing ones. When the market is strong, these stocks markedly over perform. Conversely, when the market is down, these are the worst under achievers. Basically, when they are good they are really good and when they are bad they are really. The companies that can be included in the list of volatile stocks are the likes of the CorEnergy Infrastructure Trust, STAG Industrial, NorthStar Realty, as well as Ashford Hospitality Prime.

Although the speculative and volatile stocks have spent more time decreasing in value as opposed to increasing in value over the past several months they have become attractive investments. They don’t fit the mold of what a REIT is supposed to deliver in terms of dividends, but they should perform better by the end of this year.

Take Ashford Hospitality Prime as an example. The company’s stock has decreased by 23% in 2016, despite regaining 13% in the course of last week. That increase is quite surprising given that the company is involved in legal wrangles with one of its own important shareholders, Sessa Capital. Sessa has sued Ashford over governance issues and Ashford sued them back alleging false claims.

After Cushman & Wakefield assessed assets as been worth $18 a share, the price of NorthStar Realty Europe increased by 18% last week. By the end of trading last Friday, each share was worth $12. Although the company did not go into detail about how its assets had be given that value, if they were too optimistic then the stock would still be worth having.

STAG Industrial stock increased by 10% last week. Their investment strategy reminds me of the exact opposite of a famous real estate adage that states “buy the worst homes in the best neighborhoods.” Technically speaking there is nothing wrong with buying the best warehouses in under developed markets, it is simply a method to flee away from overcrowded markets, and avoid fighting other investors over a few good deals. However, this means additional risk.

On another note, two companies have ceased trading shares on the New York Stock Exchange. Campus Crest were taken over by Harrison Street Real Estate Capital, while American Residential Properties completed a merger with American Homes 4 Rent.

STAG Industrial, Inc.(NYSE:STAG), Northstar Realty Europe Corp.(NYSE:NRE), Ashford Hospitality Prime, Inc(NYSE:AHP), CorEnergy Infrastructure Trust(NYSE:CORR)

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 04, 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 January 31, 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.

This Healthcare REIT Share Price Hasn’t Taken Off Yet

chart02In hopes of a stock rebound, activist Levin Capital Strategies made an agreement with the externally managed healthcare REIT, New Senior Investment Group, last month. This is just another development by an activist in a market that has seen several stocks become underappreciated by sellouts in 2015 and has never recovered.

In addition to agreeing to add an independent board member, Levin Capital will not object to board director nominees at the next annual meeting. When Levin complained about New Senior’s stock performance last September, they owned 6.5% of New Senior; since then, they have likely not profited from them yet.

chart05New Senior Investment Group is externally managed. In November 2014, Fortress Investment Group LLC spun off New Senior Investment Group from one of its publicly traded funds, Newcastle Investment Group, hoping that the aggregate market value of both companies would be higher.

Nevertheless, the share price hasn’t taken off. In fact, last year the stock dropped by 40%, the worst performance among healthcare REITs. On the other hand, assets saw a 50% increase and debt level almost doubled. It appears that the management pushed the boundaries last year.

chart01Their share price performance has followed trends similar to other externally managed REITs, such as NorthStar Realty Finance and Ashford Trust. Interestingly, Levin also owns shares of NorthStar Realty Finance.

Despite its short history as a standalone company and being externally managed, New Seniors does have good things going for it. The defensive sector stock currently has the highest yield among healthcare REITs and its dividend payout to AFFO is below 90%.

For those who don’t like investments dependent on Medicaid and Medicare, New Senior sources their revenues primarily from private sources. They invest in independent living and assisted living/ memory care facilities. In a spectrum between minimal and intensive care, they are situated in the middle.

New Senior’s portfolio is composed of managed and triple net lease properties. In managed properties, the company has direct participation in the cash flow of the facilities. In Q4 2015, managed properties occupancy has advanced by 310 basis points year over year, and triple net lease properties occupancy has increased by 110 basis points. Like many, their triple net lease tenants don’t have much room to cover rental payments, EBITDARM is around 1.28x.

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Additionally, AFFO per share increased 58% in Q4 2015 year over year. Their AFFO multiple is around 8.4x, as opposed to the sector median of 16x.

What concerns us most is that their total debt to total enterprise has reached 71%, which is high. Management is well aware of the leverage level, but they don’t seem to be too concerned about it. While they are selling some properties, they prioritized stock repurchases for now, where they can extract higher cap rates (even more than buying properties, according to management). As of now, their debt hasn’t been rated by major credit agencies, so it’s difficult to know exactly where they stand.

chart04In conclusion, we believe that New Senior does have some very good qualities, but they also have very bad ones. Given its share price discount and the existence of an activist as a catalyst of change, we are placing this on our activist/speculative bucket.

Source: New Senior Investment Group (NYSE:SNR), SEC

Disclaimer: This newsletter 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. Please do your own due diligence before making any investment decision. 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.

Hilton as a REIT & FelCor on a Roll

chart01Last Friday, Hilton Worldwide finally announced a plan to spin off its hotel and timeshare businesses and to create an REIT from the hotel assets. The new hotel REIT will encompass 70 properties and 35,000 rooms and will likely be one of the largest hotel REITs. The properties that are going into the REIT will be largely domestic, which according to the company will be more appealing to investors.

Although new legislation prevents an immediate tax-free spinoff into an REIT, Hilton should be exempted from such legislation because it had submitted a request to the IRS before December 7, 2015. The new legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is an REIT. It also prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off.

FelCor

chart02Among all lodging REITs, FelCor Lodging Trust seems to be on a roll over the past weeks, especially after Land and Buildings made a series of proposals in late January. FelCor argued that they have already been pursuing the proposed initiatives. Land and Buildings cited an upside of 60% to NAV to justify a 2% ownership.

The first visible development is that FelCor and Land and Buildings have recently agreed to nominate two new independent directors to the board and reduce average board tenure. Two long-serving board members will step down by 2017. FelCor will also de-stagger the board, as proposed by Land and Buildings. This is what the board looks like today (Name, Position, Director Since):

Thomas J. Corcoran, Jr., Chairman of the Board and Co-Founder, 1994

Richard A Smith, President and Chief Executive Officer, 2006

Glenn A Carlin, Outside, 2009

Robert F. Cotter, Outside, 2006

Christopher J. Hartung, Outside, 2010

Charles A. Ledsinger, Outside, 1997

Robert H. Lutz, Jr., Outside, 1998

Robert A. Mathewson, Outside, 2002

Mark D. Rozells, Outside, 2008.

The decision to revamp the board seems to be in the right direction. FelCor also announced in its Q4 results that it is pursuing the sale of five hotels, including three in New York, to repay debt balances and repurchase stocks. Last April, Standard & Poor’s rated the company B, which is two notches below investment grade. The company posted a total debt to total capitalization of approximately 52%.

What is in the company’s favor is its portfolio composed of suburban, airport, and resorts, which is not one of the subsectors potentially affected by supply growth.

FelCor has come a long way before realizing its full NAV. Besides reducing leverage and renewing its board, FelCor is faced by the cyclical nature of the lodging industry. The possibility that hotels have reached its peak has scared off many investors.

FelCor stocks rallied by 34% from its 52-week low on January 19, but it still has to rally another 34% to reach Land and Buildings’ target of $10.50.

I’d place this stock in speculative/activist portfolio.

Source: Hilton Worldwide (NYSE:HLT), FelCor Lodging Trust (NYSE:FCH)

Disclaimer: This newsletter 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. Please do your own due diligence before making any investment decision. 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.

Oh W.P. Carey,There’s a Wild World Out There

chart04The torchbearer of separating W. P. Carey into more focused entities, left the company abruptly last week, leaving us with questions about what’s going to be announced in the fourth quarter results next Thursday, Feb. 25. WPC’s CEO, Trevor Bond, stepped down to pursue other interests, according to the company. The stock dropped by 7%, but it has shown signs of recovery.

In the third quarter results, W. P. Carey tested out the possibility of separation of its entities. The separation was given a great amount of attention in the report and even the disclaimer referred to the potential separation. It sounded like the company had already made its decision; it was just testing the waters before sailing ahead

chart03W.P. Carey has a dual structure; besides being an REIT, it also has an investment management branch that oversees publicly-owned, non-listed REITs under the brand, Corporate Property Associates, or CPA®. A rough split of assets under management between REITs and the CPAs is half-and-half. The total AUM is $22 billion.

The company has not mentioned how the split would take place; however, REIT peers that have been both REIT and advisor to other funds have split the REIT from the management–external management is on one side and assets are on the other. They’ve also come up with long-term management agreements with strict clauses, tying management to the assets. Recent examples have been NorthStar Realty and Ashford Prime.

Nevertheless, these two companies have not had successful separations. Both NorthStar and Ashford Prime saw their share price plummet and occupy the bottom position of the stock performance last month.

We all know it is a wild, wild world out there. As if that’s not enough, besides the drop, they’ve been the subject of activist attacks who are looking to close the gap between their NAV and the discounted share price.

Mr. Bond was very positive about the separation during the third quarter conference call. This is what he said during the call:

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Former CEO

“We believe that separation would provide for a more focused and simplified structures that would be easier for investors to understand. We think that aligning each platform with sector specific shareholders is desirable and that we could achieve a cost of capital most appropriate to each entity by this alignment. We think that would allow us to allocate capital in a more focused way. We think this this idea allows for better alignment of currency exposure, each of the platforms are different investors.

Most importantly, I think we feel that this could potentially allow us to pursue individual growth and business opportunities for each of the separate entities. For instance, our investment management arm would have a greater ability to grow unconstrained by REIT status. We can also pursue individual inorganic growth strategy, strategic opportunities having a public currency that we could use for that.

So, I think the bottom line here is that this creates even stronger business that can pursue better growth opportunities as separate entities and create long-term value, and we look forward to posting you more in the future as that unfolds.”

If I were on the board right now, I would not pursue the split–very bad timing. Besides the NorthStar and Ashford bad examples, the market has been very volatile and big changes in this environment can go south quickly. The market can either say ‘we’re glad you did it’ or ‘what a bad idea, let’s sell off’.

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The new CEO

Despite the dual nature and having become an REIT in 2012, W. P. Carey carries a good reputation in the market. It has been managing real estate for 40 years, its assets are net leased, and diversified. The portfolio is pretty much split among office, industrial, warehouse, and retail. Occupancy has reached 99%; it has been rated investment grade, and they have distributed dividends consistently since 1998.

With the share price drop, the dividend yield is now at 7.2% and the AFFO multiple has been around 11x. As for being diversified, it is more challenging to compare with its peers; but on the surface, it looks underpriced.

Source: Seeking Alpha,W. P. Carey Inc.(NYSE:WPC), Fast Graphs

Disclaimer: This newsletter 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. Please do your own due diligence before making any investment decision. 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.