UMH Properties (UMH) has performed rather well since my last bullish article on it, posting an 8.2% return (9.6% including dividends) since the end of August, far outpacing the 3.9% return of the S&P 500 (SPY) over the same timeframe. While nobody likes to pay too much for a stock, I don’t find that to be the case with UMH, as I still see the stock as being undervalued. In this article, I evaluate what makes UMH a continued buy at the current valuation, so let’s get started.
(Source: Company website)
A Look Into UMH Properties
UMH Properties is a growing REIT that owns and operates a portfolio of 124 manufactured home communities, consisting of 23,400 developed home sites. The company is led by Samuel Landy, who has served as CEO for over 25 years. It has a gross asset value of $1.4 billion, and in 2019, UMH generated $147M in total revenue. As seen below, its properties are primarily located in the Northeastern and Midwestern regions of the United States, and over half of its properties are located in the Marcellus and Utica shale regions, which are large producers of natural gas. According to the U.S. EIA, natural gas demand has grown by 4.2% YoY for the week of December 3rd, 2020, compared to the same week last year. This is a positive sign for the economic health of the communities in which UMH operates.
(Source: November Investor Presentation)
UMH appears to be firing on all cylinders, with 98% rent collection, and NFFO (normalized FFO/share) growing by 20% YoY, from $0.15 in Q3’19, to $0.18 in Q3’20. NFFO also grew by 8.6% YoY for the first nine months of the year compared to the prior year period. In addition, rental income and same property NOI grew by an impressive 10% and 13% YoY, respectively. This was driven by strong occupancy growth, which improved by 320 bps YoY, to 86.9%. The stronger NOI growth compared to rental income growth is as a result of operating efficiencies. This is driven by site acquisitions that are nearby UMH’s other owned sites, which results in management efficiencies. UMH’s operating expense ratio reducing by 280 bps YoY, to 44.7%.
Plus, sales of manufactured homes increased by 54% YoY. I see home sales as being a stable, long-term growth driver, since UMH will continued to collect rent on the underlying land leases. Land tenants who own their manufactured homes have significant “skin in the game”, and are therefore more likely to continue paying rents. Currently, owned homes represent 65.5% of UMH’s sites, while rental homes represent the remaining 34.5% of sites.
Looking forward, I see no signs of UMH slowing down, as it recently closed on the acquisition of two communities, containing 310 sites for a total purchase price of $7.8M. The sites currently have an in-place occupancy rate of 64%. While this may not seem high, it fits into UMH’s playbook of opportunistically buying properties, and turning them around, as it plans to begin the initial work of infilling the communities with rental homes. Plus, UMH has an active acquisition pipeline, with letters of intent executed on four communities, with a purchase price of $21M, and 64% occupancy, which represents further growth potential.
I also see UMH benefiting from the rising trend of home ownership, given the currently low interest rate environment. This is supported by the Radian (RDN) Home Price Index, which indicated an expected 7.8% YoY growth in home prices over the next 12 months. This would be on top of the annualized growth rate of 7.4% in home prices on through October of this year.
Turning to the balance sheet, I’m encouraged to see that UMH has deleveraged its balance sheet, from a net debt to adjusted EBITDA of 6.6x at the end of last year, to 5.8x as of September 30, 2020. UMH is rather unique in that it also invests in other publicly-traded REITs. UMH’s net debt minus securities to adjusted EBITDA falls lower, to 4.7x. Plus, UMH has benefitted from low interest rates and from its recent GSE (government sponsored enterprise) financing at a 2.62% interest rate. This enabled it to redeem some of its preferred stock, thereby saving 500 basis points on the interest rate spread, which is equivalent to $0.12 per share going forward.
Risks to Consider
As with all REITs, UMH is subject to interest rate risk. An increase in interest rates could dampen the company’s growth prospects. I don’t see this as being a near-term risk, as the Federal Reserve recently signaled its intent to keep the benchmark short-term interest rate at zero through at least 2023, and possibly longer. However, this is something worth monitoring for investors.
Another risk to consider is UMH’s REIT securities portfolio, which is comprised of 40% retail, and 44% industrial, and 15% office. While the retail and office sectors are more at risk during the pandemic, I see this as being offset by the tailwinds that industrial REITs have gotten from increased e-commerce due to the pandemic. As Q3’20, the securities portfolio value was down by 27% since the end of 2019. However, I expect that the portfolio value has rebounded this quarter, given that many retail and office REITs have seen a rebound in their share prices since the positive news about the vaccine in November. As seen below, the securities portfolio has continued to generate dividends this year. Nonetheless, this is something worth monitoring.
(Source: November Investor Presentation)
UMH Properties is firing on all cylinders, with strong rental income, NOI, and NFFO/share growth. I see UMH benefiting from the rising trend of home ownership in the U.S., and rising demand for natural gas should benefit the economic health of UMH’s communities, which are located near major energy producing regions. Plus, UMH was able to take advantage of GSE financing and use the proceeds to lower its cost of financing, by redeeming higher cost preferred stock.
At the current price of $15.53, and forward P/FFO of 22.2, the shares are not necessarily cheap. However, I consider it to be reasonable, given the durable nature of the income stream, and the solid double-digit FFO growth estimates, as seen below. The shares are trading at a forward P/FFO of 15.8, based on the 2022 FFO/share estimate of $0.98.
(Source: Seeking Alpha)
Plus, UMH is trading much cheaper than its peers, Equity Lifestyle Properties (ELS) and Sun Communities (SUN), which are trading at forward P/FFO of 28.1 and 28.4, respectively. Analysts seem to agree that UMH is undervalued, with a consensus Strong Buy rating (score of 4.8 out of 5), and an average price target of $17.67. Buy for income and growth.
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Disclosure: I am/we are long UMH. 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.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.