UMH - UMH Properties: Tax Advantaged Dividend Growth At Fresh Discounts

• Affordable housing demand remains strong.
• Disappointing 2Q earnings have UMH shares down 28% YTD.
• Share price looks to the past; listen to management and look to the future.

The Department of Labor Statistics’ July employment report , detailing the creation of 528,000 new jobs, describes a vibrant economy. If past is prologue, the report also indicates new household formation and that already robust demand for affordable housing will remain strong and even strengthen. The share prices for multifamily housing REITs are out of sync with this prognosis.

2022 has been hard on REITs and even tougher on the three manufactured housing REITs.

Equity LifeStyle ( ELS ) and Sun Communities ( SUI ) each declined after their 2Q results were released but have started to come back a little. UMH Properties' ( UMH ) August 3 ^rd report however, knocked it to the floor and the ensuing REIT rally left it behind.

2Q22 is History

UMH’s second quarter results missed consensus estimates due to a number of factors, among them, one time legal and travel expenses related to recent debt offering and dual listing in Tel Aviv, and carrying costs of securities issuance and charges related to the July 26 ^th redemption of their Series C Preferred shares. These were one-time charges that will not recur, but it seems that investors read the first part of the report and failed to finish it before turning to sell their shares.

The Brighter Future

The July redemption of the Series C Preferreds is the fruit of UMH’s long, hard won path to a lower cost of capital. In issuing the 4.72% Note in Israel and selling higher priced common equity through their ATM, UMH was able to redeem the ~$250MM 6.75% preferred UMH-C and pocket significant savings. The net savings on the preferred dividends will contribute $0.14 FFO/share annually.

What’s more, UMH can do a very similar recapitalization in January 2023 when its Series D preferred becomes callable. If financial markets align, a similar $0.12/share in savings can go directly to the FFO bottom line.

UMH has raised its dividend about 5% in each of the last two years. CEO Sam Landy forecasts dividend increases every time he gets in front of a microphone .

UMH’s Dividend Growth is Special

At today’s pricing, UMH’s common stock delivers about a 4% yield. 4% isn’t really all that exciting, but taxable investors enjoy accounting treatment that enables deferral of taxation on most of the dividend income until the shares are sold. Depreciation and amortization expenses on the REIT operational level are passed through to shareholders to characterize the dividend income as a return of capital. In 2021, almost 97% of UMH’s then $0.76 dividend was characterized as a return of capital.

What that means to the individual taxable investor is that UMH’s 2021 dividend spends better than other ordinary income or qualified dividends because very little tax is currently due. Comparison to a qualified dividend looks like this:

On qualified dividends from say, Apple ( AAPL ), you owe 20% in federal income tax leaving you with $0.61. After paying taxes currently due on UMH’s 2021 dividend you have $0.75 remaining after-tax. That $0.75 reinvests bigger or, in today’s inflationary environment, pays for more expensive gasoline and groceries.

2021 is history that we can no longer attach, but if you look back over the last five years, it seems that dividend characterizations are nearly 100% return-of-capital is UMH’s run rate.

Of the $3.64 paid in dividends over the last five years, $3.62 was treated as return of capital. That treatment reduces your cost basis, thereby increasing the capital gain (and related tax due) when the shares are eventually sold.

When we asked UMH CFO, Anna Chew, what accommodates the high return of capital ratio, she responded that it was application of depreciation and amortization allowances. If you look at recent community purchases in South Carolina and Michigan , you might perceive that UMH is an acquisitive growth company. When they buy and redevelop manufactured housing communities, UMH follows on with installation of hundreds of new homes for their rental program. These new home purchases create an extended stream of depreciation and amortization.

Based on the volume of UMH’s recent and forecast acquisitions, we are anticipating that the dividends will continue to enjoy income tax deferral in present and future years. If the dividend raises come, they should enjoy the deferral as well.

So, if you like affordable/manufactured housing, which company should you buy?

The answer depends on the type of account through which you are investing: Taxable or tax sheltered (IRA).

I made my case for the tax optimization of owning UMH shares in a taxable account. If I don’t sell my shares, I defer the tax indefinitely. If you look at SUI or ELS, you can see that their 2021 dividends were characterized very differently.

I am long UMH, SUI, and ELS. I like each company for the sector that they are in and the opportunity it presents. But based on this income tax insight I own the shares differently. I’m long UMH in my taxable account and enjoy the income tax deferral. I own SUI and ELS in my SEP/IRA where I can reinvest the entire, more highly taxable dividend while taking advantage of the retirement plan’s tax advantaged structure.

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