UMH Properties (UMH 0.19%) is among a small number of manufactured home real estate investment trusts (REITs) that investors can buy. Its 5% dividend yield is at the high end of the group. There are some good reasons for that, one of which is that it paid out more in dividends than it generated in adjusted funds from operations (FFO) in the first quarter. If management's plans play out as expected, that situation will correct itself as the year progresses.
A unique player
The major players in the manufactured home sector, basically industry giants Sun Communities (SUI 0.14%) and Equity Lifestyle Properties (ELS -0.36%), tend to focus their portfolios around geographic regions with large retirement interest (think Florida). UMH, with a market cap of a touch under $1 billion, is notably smaller than both Sun and Equity Lifestyle, which have market caps of $17 billion and $13 billion, respectively. Its portfolio is located predominantly in the Northeast. It is similar, but different.
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There's one other big difference between these three REITs. Sun and Equity Lifestyle both handily cover their dividends with adjusted FFO. UMH didn't manage that in the first quarter. To put some numbers on that, Sun's adjusted FFO payout ratio was roughly 75%. Equity Lifestyle's adjusted FFO payout ratio was 60%. Neither of those figures is problematic. UMH's adjusted FFO payout ratio was 102.5%. A dividend payout ratio over 100% is a warning sign that a company's dividend may not be sustainable.
This is part of the reason UMH's dividend yield is 5%, compared to yields of 2.65% for Equity Lifestyle and 2.8% for Sun. Is the higher yield worth the risk? It depends on whether UMH's plans play out as expected.
Getting below 100%
In 2022, UMH had a supply problem. According to Chief Executive Officer Samuel Landy: "One year ago, our results were impacted by a lack of inventory for sale and rent which resulted in limited revenue growth for most of last year." To solve that problem, the company bought new properties and started the work of installing new homes. While this is clearly the right way to solve the supply headwind, it is not a quick fix. That has left the company with extra debt and higher interest costs as it gets the new units ready for sale or rent. Increased revenue won't arrive until it has worked through this process.
As 2023 progresses, the expectation is that costs will decline (notably on the interest side) and revenue will increase, as units come on market and are bought or sold. There already are signs of progress. For example, the REIT's manufactured home sales increased 70% year over year in the first quarter. Rental income jumped 9%, and same-store occupancy increased 100 basis points.
It's also worth noting that the dividend was increased in the first quarter to $0.205 per share versus the $0.20 in adjusted funds from operations (FFO). In other words, the board knew full well that the coverage ratio was going to be tight in the first quarter, but it raised the dividend anyway. Companies generally avoid making dividend increases that aren't sustainable, so it wouldn't be unrealistic to read into the increase a little -- the company likely believes the dividend will be supportable as the year progresses.
Worth the risk?
When it comes to manufactured homes, UMH is a slightly different story from its larger peers. And with a high payout ratio, it makes sense for investors to tread with caution. However, it looks like UMH has what it takes to keep supporting its high yield. For more aggressive investors, willing to track their portfolios closely, it might be worth the risk to add this high-yielding stock.
