The strong rally in the broader market has left many quality income names behind. Looking at the performance of Invesco QQQ ETF (QQQ), which has returned 38% on a YTD basis, it appears that investors are placing a lot of value on digital assets, especially during this pandemic. As such, I believe this opens up opportunities to invest in well-positioned and durable physical assets, such as real estate. In this article, I evaluate UMH Properties (UMH) on whether it makes an attractive long-term investment, 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 123 manufactured home communities, consisting of 23,200 developed home sites. The company is led by the Chairman, Eugene Landy, who founded the company, and Samuel Landy, who has served as CEO for over 25 years. The CEO also serves as a Director for Monmouth Real Estate Investment Corp. (MNR). 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.
For reference, these two shale regions are the #1 and #3 most productive regions for natural gas in the United States (with the Permian basin holding the #2 spot). I view this as a positive for UMH and its local economies in those areas, as natural gas is expected to be a strong component of energy consumption for decades to come. As seen below, U.S. consumption of natural gas continues to grow on a year-over-year basis, with 70.8 billion cubic feet of consumption per day this week, compared to 69 Bcf/d during the same week of last year.
(Source: U.S. Energy Information Administration)
What I also like about UMH is the recession-resistant nature of its properties. Much like well-managed Apartment REITs, UMH receives rent checks from a stable tenant base. Additionally, the majority of UMH’s units (66%) are owned by its residents who continue to pay rent on the lots on which their homes sit on. This helps to ensure that its tenants have sufficient ‘skin in the game’, which lessens the likelihood of payment defaults.
As seen below, UMH enjoys healthy operating metrics, with a 95.1% occupancy rate on its rental units, and a total portfolio occupancy (including recent acquisitions) of 84%. The portfolio also continues to grow, as the company has added 5 communities totaling 1,600 home sites since last year. Currently, UMH has an additional 1,700 in available acreage to be developed. As such, I see UMH as being well-positioned to ride the wave of increasing homeownership trends. This is supported by a report this month from the U.S. Census Bureau, which indicated that U.S. homeownership increased year over year from 64% to 68%.
(Source: August Investor Presentation)
Like other commercial real estate sectors, COVID-19 has presented unique challenges to UMH’s operations. For example, gross sales were down by 14% in the latest quarter due to stay-at-home orders and the inability to show homes in person. I see this as being temporary, though, as many states have now eased lockdown restrictions, thereby improving consumer mobility. Meanwhile, I’m encouraged to see that rental income increased by 12% YoY, with same-store occupancy improving to 85.8%. This represents a 2% improvement over the 83.8% that the company saw in Q4 ’19 (pre-pandemic).
Additionally, rent collection is holding stable, as the company collected 98% of its rents in the last quarter, which is consistent with pre-pandemic levels. As such, it appears that UMH is weathering this crisis well, with its resilient properties. Management reaffirmed the attractiveness of its properties during the downturn by noting the following, during the Q&A session of the last conference call (emphasis added by author):
“I mean, when we went out and talked to investors before COVID, the most common question was how would we do in a downturn? And we always predicted we do as well as apartments, but as it appears in practice what actually hurt us we did better because our products so affordable. There may have been some doubling up where people who couldn’t afford other units came into our homes. People did not move, they stayed longer, and other people came to our product.”
Another positive catalyst for UMH is that it is working with GSEs (government sponsored entities) to get the same property-type recognition on its rental manufactured homes as that of apartments. This would provide UMH with GSE debt at rates below 3%, thereby allowing the company to finance $310 million of rental homes that were originally purchased with preferred stock.
This has the benefit of reducing the company’s cost of capital, as management intends to redeem higher cost preferred stock with proceeds from lower cost GSE mortgage debt. This could materially benefit the FFO and help the company reduce its dividend payout ratio, as management noted on the last conference call (emphasis added by author):
“This would allow us to redeem $95 million of our 8% Series B preferred stock, generating additional FFO for common shareholders of approximately $0.11 per share annually. As we refinance our capital stack and continue to improve our operating results, we have the potential to drive significant earnings growth throughout the rest of this year and into 2021. By executing on these items, we expect to make significant progress in reducing our payout ratio, which we anticipate will be below 100% in 2021.”
Additionally, management has indicated that it does not plan on increasing exposure in its REIT investment securities portfolio, which represents 7% of its undepreciated assets. As seen below, the securities portfolio has generated a cumulative net realized gain over the past decade. However, I see it as a risk, as it may detract management’s focus from its core business, and am encouraged to hear that management does not plan on increasing its exposure.
(Source: August Investor Presentation)
Turning to the balance sheet, I like the fact that UMH’s Net Debt to Adjusted EBITDA has trended down since last year, and the Net Debt to Total Market Capitalization is under 30%. The Fixed Charge coverage ratio remains tight at 1.5x. However, I expect for it to improve after the company adjusts its capital stack by replacing higher cost preferred stock with lower cost GSE mortgage debt.
(Source: August Investor Presentation)
Lastly, taking a look at analyst estimates, the average price target for UMH is $16.50, with a consensus recommendation score of 1.6, which implies a rating that is between a Buy and Strong Buy. The shares appear to be undervalued based on these metrics, as the current share price sits comfortably below the average target price.
UMH Properties is a growing REIT that owns and operates a portfolio of 123 manufactured home communities, consisting of 23,200 developed home sites. The portfolio has shown resiliency while facing COVID-19, as demonstrated by the improved occupancy metrics since the end of last year, and rent collection rates that are on par with pre-pandemic levels. In the near term, I see the company as benefiting from a refinancing of the capital stack by redeeming its higher cost series B preferred stock with lower cost GSE mortgage debt. Longer term, I see UMH as benefiting from increased homeownership trends in the United States through the development of its 1,700 acre land bank, and future acquisitions.
p class=”p p5″>As such, I have a favorable view of the stock and believe there is room for share price appreciation. For those investors who seek safer dividend income than from the common shares, UMH’s preferred stock issues UMH.PC and UMH.PD can be considered. They are both trading at close to their redemption values, with 6.7% and 6.4% yields, respectively, and have call dates in July 2022 and January 2023.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.