JamesBrey/E+ via Getty Images

JamesBrey/E+ via Getty Images

UMH Properties (NYSE:UMH ) is a real estate investment trust that owns mobile home communities primarily in the Rust Belt region of the United States. It is one of those REITs that I feel conflicted about.

On the one hand, residential rents are going up for all types of housing, including manufactured homes. That makes UMH's portfolio of 130 mobile home communities with over 24,000 home sites and 8,800 rental units look attractive. This is especially true considering the fact that, after a 20%+ pullback in recent months, UMH's dividend yield now sits at 4.15%.

Also noteworthy is the fact that UMH's occupancy has bumped up from about 82% before the pandemic to 86% in Q1 2022 (though same-property occupancy has edged lower in recent quarters). This is a big positive for UMH, because mobile homes are not actually all that mobile. It can cost $10k or more to move a home from one site to another, so residents tend to remain at their given locations for much longer than the average apartment or single-family home renter.

However, UMH also owns a $57 million portfolio of "marketable securities," made up of almost comically low-quality REITs and REIT preferred equities. I say "almost" because it would be funny if it wasn't so frustrating to see a management team allocate shareholders' capital to such (in my opinion) garbage REITs.

UMH's management team make fine manufactured home landlord-operators, but they are horrible stock pickers. You don't need to take my word for it. I will show you the results below.

Fortunately, though the company's official policy is to cap its securities portfolio at no more than 15% of gross assets, it currently only represents 3.3% of gross assets. This is down significantly from the end of 2021. At the end of 2021, UMH's securities portfolio was worth $113.7 million and is now reduced to $57 million.

However, the reason for this dramatic drop in its securities portfolio is not simply that management decided to do away with it completely. Rather, UMH held 2.7 million shares of stock in Monmouth Real Estate Investment Corporation (MNR), which was acquired in February.

There are two pieces of good news about the securities portfolio:

Looking forward, the low-quality securities portfolio should have increasingly little effect on UMH's performance from now on. Even so, it is difficult for me to believe that the extraordinarily poor judgement shown by management with the securities portfolio will turn into extraordinarily good judgement with the growth of its manufactured home portfolio.

I do believe UMH's management are better mobile home landlords than they are REIT stock pickers, but I still believe there are better options out there for investors looking for exposure to this space.

Plenty of articles discuss UMH's overall portfolio and growth prospects, and those interested in learning more about UMH would do well to look through the company's June investor presentation slideshow. The REIT does have some things going for it, and I do not mean to imply otherwise.

But, at the same time, management's past judgement with the securities portfolio is so bad that it makes me wonder if they have learned their lesson and become better capital allocators because of it.

Let me show you what I mean. Here's the latest snapshot of UMH's securities portfolio from the 2021 10-K:

Here are a few notes on these holdings:

In case you're thinking, "Surely management deserves some credit for the huge winner of MNR," keep in mind that the former CEO of MNR is the brother of UMH's CEO. MNR also held a securities portfolio before it was acquired, and its securities portfolio included as one of its larger holdings... wait for it... UMH Properties.

It was a way for the Landy brothers to have ownership stakes in each other's respective REITs while focusing on their own.

Though the securities portfolio increased in value over the course of 2021, the dividends UMH received from the portfolio decreased. Here's the 2021 10-K (bold text mine):

Dividend income decreased from $5.7 million for the year ended December 31, 2020 to $5.1 million for the year ended December 31, 2021, or 11%. This decrease was primarily due to reduced dividends from our securities holdings. Dividends received from our marketable securities investments were at a weighted average yield of approximately 4.4% and 4.7% at December 31, 2021 and 2020, respectively.

Gain on sales of marketable securities amounted to $2.3 million for the year ended December 31, 2021. Increase (decrease) in fair value of marketable securities increased from an unrealized loss of $14.1 million for the year ended December 31, 2020 to an unrealized gain of $25.1 million for the year ended December 31, 2021. As of December 31, 2021, the Company had total net unrealized losses of $14.3 million in its REIT securities portfolio.

By the end of the first quarter, the total net unrealized losses had risen to $46.1 million, both because the prices of the holdings had fallen and because the portfolio no longer had the sizable MNR position to buoy it.

Management says that these securities are long-term investments and that they intend to hold them until they rise back to their cost bases. If that is the case, then this securities portfolio will be a fixture of UMH's overall portfolio for a long time. Management seems content to go down with the ship on CBL and PEI (and perhaps DHC and OPI) just as they did with WPG.

It is hard for me not to call into question management's investment decision-making judgement and prowess knowing that they poured tens of millions of dollars (shareholders' money!) into dying malls and overleveraged REITs with misaligned management structures.

In short, what I garner from UMH's record with its securities portfolio is a management team that takes excessive risk that is not compensated by higher rewards. Instead, it is often compensated with negative returns.

With this in mind, the 20%+ pullback in the last few months and the ~30% pullback YTD seems to be the market's way of saying, "Wait a minute, this thing isn't worth 30x FFO like the other manufactured home REITs."

Even after the pullback, UMH is currently valued at around 21.3x FFO. That still strikes me as being overvalued relative to the multiple residential REITs with similar (or lower) FFO multiples and better track records.

My opinion on UMH would be different if management publicly stated that their decision to keep a securities portfolio at all was a mistake, that they made some poor investments within it, and that they will seek to sell it off completely as quickly as possible to focus solely on manufactured housing. But they have never said that (to my knowledge), which leads me to believe that they have not learned their lesson.

Those who do not admit their mistakes are often doomed to repeat them, in some form or another.

As an example of an extraordinarily well-operated manufactured home REIT, I present to you Equity LifeStyle Properties (ELS). I explained why ELS is my pick in the mobile home REIT space in this article.

Though ELS trades at the higher FFO multiple of 26.5x, it more than deserves this premium to UMH because of its long track record of smart capital allocation and extremely minimal equity issuance. Though ELS's dividend yield of 2.3% is much lower than UMH's 4.15%, the REIT has far better rewarded shareholders over time, both in terms of total returns...

...and in terms of dividend growth:

As you can see, I threw in fellow manufactured housing REIT Sun Communities (SUI) for further comparison.

The only reason I can think of that an investor might choose UMH over ELS is the dividend yield differential. But if you're an income investor primarily interested in current yield, I think there are much better options out there to pursue than UMH.

For instance, you might take a look at UMH's Preferred equity Series D (UMH.PD), which is currently trading slightly under redemption value and offers a yield of about 6.4%.

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This article was written by

My adult life can be broken out into three distinct phases. In my early 20s, I earned a bachelor's degree in Cinema & Media Arts (emphasis in screenwriting), but I hated working in Hollywood. Too much schmoozing and far too much traffic. So, after leaving California, I earned a Master of Fine Arts in Creative Writing from Western State Colorado University. I loved writing fiction, but it didn't pay the bills.

In my mid-20s, I became a real estate agent and gained some very valuable experience in residential and commercial real estate. But my passion for writing never went away.

Now, in my early 30s, I write for Jussi Askola's excellent marketplace service, High Yield Landlord, as well as its sister service, High Yield Investor. I also perform freelance research for a family office that owns and manages over 40 net lease commercial properties in Texas and Arkansas. Writing about finance and investing scratches that creative itch while paying the bills - the best of both worlds.

I'm a Millennial with a long-term horizon and am fascinated with the magic of compound interest and dividend growth investing. I also have an interest in macroeconomic trends, though I am but an amateur in that field.

Disclosure: I/we have a beneficial long position in the shares of ELS, O, UBA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.