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I Am Not In The Yield Chasing Business, Are You?

These days, there are too many sucker yields being touted: those investment opportunities that lounge outside of moneymaking alleys, looking oh-so cool.

They’re edgy. They’re independent. And they scream sex appeal, promising lives of luxury should you follow their lead.

How’s a wide-eyed, profit-seeking investor supposed to say no to that kind of deal?

Sure, your mama warned you about get-rich-quick schemes. But this isn’t some “make 2,000% in a year” offering that’s beckoning you over. It’s a double-digit yield from a dividend-yielding REIT.

Which automatically makes it safe. Right?

Besides, you’re not really going to buy a sucker yield, unless of course you want to turn into a lollipop…

If that’s your story and you’re truly going to stick to it, then I suppose you’re not exactly wasting your money. But you are most definitely wasting your time.

If it’s yielding double digits, then it’s probably a dangerous play. Make no mistake about it.

You’re playing with fire thinking otherwise, and it’s your money that’s ultimately going to get burned.

Beware of the Sucker Yields

There’s a reason why I call them “sucker yields,” and it isn’t just because they sucker you in with big promises and dreams of glory. It’s also because they make an ultimate sucker out of the REITs themselves as well.

Nine times out of 10, a really high yield is a sign of a company that’s trying too hard. For whatever reason, it’s become focused on looking good in the markets at the expense of its balance sheet.

In order to pay out a dividend beyond what it’s bringing in, a REIT has to cut into its capital base. That’s never a healthy practice either in theory or in practice, resulting in cut dividends and slashed share prices as well.

Put bluntly, its investors are left with nothing. Or worse. That’s the unavoidable downside when you fall for a sucker yield.

But don’t despair, because falling for them in the first place is a completely avoidable fate. These investments are easy to spot if you can look past the dazzling fool’s gold they’re displaying.

First off, you need to learn to trust your gut. If it looks too good to be true, it probably is.

If you’re still tempted, then do your due diligence. Check the REIT’s balance sheet, payout ratio, dividend record, management alignment, and most importantly, listen to trusted analysts who will tell it like it is…

Also look into what kind of profit it’s bringing in, whether there are any obvious threats to its ability to bring in consistent income, and what forces could force the company to cut the dividend.

Whatever information you come up with, here’s the bottom line: It’s always best to proceed with caution when your hard-earned money is on the line. So focus on dividend safety much more than dividend yield. Afterall, the world is stressful enough and my goal here, as always, is to help REIT investors sleep well at night.

Why Did I Sell These Two REITs?

As my readers and followers know, I decided to part ways (sell my shares) with Monmouth Real Estate (MNR) and UMH Properties (UMH) a few weeks ago. More specifically, I was forced to downgrade both REITs for obvious reasons, and shall I say, because they were both yield chasing.

You see, as a REIT writer, I take pride in my research and thousands of my followers rely on my recommendations. So, when I endorse a BUY or a STRONG BUY, I am not just telegraphing to the world that I’m bullish, I am also signaling that the company is safe and that I have vetted the management team.

This means that I don’t base my recommendations solely on fundamental analysis, oftentimes a meeting with management could provoke me to either upgrade or downgrade a company.

Ultimately, my primary job is to put myself in the shoes of the investor, and to determine the best course of action, based on the most important investment objective, and my mantra: protect your principal at all costs.

I have been covering Monmouth Real Estate and UMH Properties for quite some time, and over the years I have voiced concerns that both REITs invest in REIT securities, their own and other REITs. I have generated impressive gains while owning both REITs, but I have always been fearful that the securities portfolio elevates risk. Back in June 4, 2018 I had a Strong Buy on UMH and I cautioned,

“I have never liked UMH’s securities portfolio, as I feel as though the company should stay 100% focused on executing its own model. At quarter-end, UMH had net unrealized losses of $14.4 million in the securities portfolio, resulting in a $25.9 million total decrease in fair value for the quarter. UMH includes this decrease in FFO, but excluded from Core FFO since it’s unrealized.”

When I did more research and discovered that UMH and Monmouth owned quite a few high-yielding securities, aka sucker yields, I immediately downgraded the REITs to a HOLD.

To be perfectly blunt, I didn’t take the decision to downgrade lightly, because I had Strong Buys on both REITs, but it would have been disingenuous for me to ignore the fact that I had Strong Sells on CBL Properties (CBL), Government Properties (GOV), and Washington Prime (WPG). In the simplest terms, I cannot recommend a stock when I am recommending throwing good money after bad. As an investor in Monmouth and UMH you are also indirectly a shareholder in these high-yielding REITs.

Some of the bullish analysts make the argument that the securities portfolio is just a fraction of the capital stack or that the REIT portfolio has performed well in years’ past. Regardless of the size of the REIT portfolio, there are clearly paper losses, and the overhang will likely persist so long as these dangerous REITs are in the portfolio.

Source: Yahoo Finance

Let’s take a closer look at Monmouth’s REIT Common securities:

As you can see, Monmouth owns six out of eleven REITs that are not on my BUY list and five of them are on my Strong Sell list. Out of the $171 million that Monmouth has invested in common shares, around $103 million is invested in REITs that I have a Strong Sell rating on. Also, around 7% of the invested capital is in UMH.

In regards to performance of the securities portfolio, Monmouth provides the following:

Keep in mind that during the periods 2013-2016 Monmouth was not covering its dividend from free cash flow (or AFFO) and was relying on the securities portfolio to fund the dividend. I was reluctant to issue a Strong Buy on Monmouth until I saw a trend of rising dividends.

Source: FAST Graphs

As intelligent REIT investors know, the best stocks to own are the companies that demonstrate a reliable record of dividend growth. And just as I was warming up to Monmouth’s recent dividend growth record, I found out that I was indirectly a shareholder in five sucker yield REITs that were extremely dangerous.

In regards to UMH, here’s a snapshot of the common securities portfolio:

As you can see, UMH also holds a few “sucker yields” including CBL Properties, Government Properties, Select Income (SIR), Senior Housing Properties (SNH), and Washington Prime. These five REITs account for around 53% of the securities portfolio. Also, UMH owns shares in Monmouth, that accounts for 18% exposure. I could not locate a performance chart for UMH’s REIT portfolio (like MNR provided) but I am sure that the results would be similar (to MNR) since the two REITs own many of the same companies.

Source: FAST Graphs

More concerning that Monmouth, UMH has not increased its dividend in quite some time, and the company was forced to cut its dividend from $1.00 per share in 2007 to its current distribution of $.72 per share. As the above chart highlights, UMH has not been able to cover its dividend eight out of ten years, and the company has had to rely on its $130.9 million REIT portfolio to fund the dividend.

But wait?

In 2018, according to filings, UMH’s REIT securities portfolio generated dividend income of $7.603 million (on $130.9 million) and in 2017 the REIT securities generated $8.134 million (on $132.9 million), a 7% decline in dividend income. Although UMH does not report AFFO (no-GAAP), consider the analyst estimates below:

Source: FAST Graphs

To be clear, I like the business models for Monmouth and UMH, but given the fact that both REITs have historically relied on the securities portfolio to fund dividends, I cannot support either recommendation. It's simply disingenuous for me to deploy capital into a company that is not making sound investments. It requires discipline to walk away, and given the fact that both of these REITs own what I consider to be toxic picks, I cannot and will not budge until I see management begin to allocate capital more wisely.

Simply put, I’m not in the yield chasing business, I prefer sleeping well at night!

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