Troubled Texas REIT sends confusing signals to shareholders

As the year draws to a close, questions continue to linger for investors who own United Development Funds real estate investment trusts and the reps who sold them.
The four UDF-managed REITs have combined assets of $1.3 billion but have not issued financial reports since November 2015. Three are nontraded REITs while the fourth, UDF IV, was delisted by Nasdaq this fall and is currently trading on the OTC markets.
The signs coming out of UDF, which also manages a mortgage REIT, United Mortgage Trust, clearly have some in the marketplace confused.
Last month, UDF IV, a mortgage and development REIT, issued a cash distribution of 8 cents per share to shareholders, clearly a positive indication for a company that froze its dividend months ago. UDF IV has also recently said it has paid down its debt.
If the REIT were to issue such a dividend monthly, that would give investors an annual yield of 96 cents per share, indicating a per share value of close to $12 based on an annual yield of 8%.
However, another REIT, UDF III, issued a letter to shareholders last week both outlining events of the past year, including “the attack” last December by Hayman Capital, a hedge fund with a short position in UDF IV shares, and ending on a note of reassurance.
Twelve months ago, Hayman Capital said UDF IV had been operating for years like a Ponzi scheme. Then, the FBI in February raided the REIT’s offices in suburban Dallas. At the time, Nasdaq halted trading of UDF IV shares at $3.20, down 81% over the prior 12 months.
“Despite the unexpected challenges facing management and the fund, management remains confident in the fund’s business strategy and ability to capitalize on increasing housing demand,” according to the letter, which was dated December 5 and signed by the board of directors for UMT Services Inc., its chair, Todd Etter, and two directors, Hollis Greenlaw and Michael Wilson.
UMT Services is the adviser, or management company, for UDF. Clouding the waters further is the fact that no other UDF REIT has issued such a reassuring statement to investors.
“UDF keeps blaming Hayman Capital but gives no explanation for not filing financial statements,” said Alan Rosca, a plaintiff’s attorney with close to 200 clients who invested in various UDF REITs. “They keep pointing the finger at the other guy and trying to divert attention.”
“Thousands of shareholders don’t know what’s going on and right now there’s nothing from the regulators,” he said. “It’s an odd state of limbo.”
Company spokesman Jeff Eller did not respond to specific questions about the potential for UDF IV to issue a more regular dividend or why only UDF III and none of the other UDF REITs sent shareholders a letter to update its status.
Most recently in October, the Securities and Exchange Commission issued a Wells notice against UDF IV, an indication that SEC staff has made a preliminary determination to possibly recommend an enforcement action against the company.
UDF IV, with $684 million in assets according to SEC filings, closed yesterday at $3.77 a share. UDF-branded REITs and private deals were high yield offerings, promising investors returns of 8% to 10%.