- The manufactured housing industry has entered a period of sustainable growth that looks to be still in the early innings.
- Rental home transition throughout the industry provides a durable vehicle for FFO growth along with disciplined community acquisitions.
- UMH is cheaper than peers Sun Communities & Equity LifeStyle while having similar catalysts and tailwinds going forward. UMH is a strong buy.
Scouring the stock market in search of reasonably priced growth names in times such as these can be quite a tiresome process. My goal? To find companies riding long term, durable tailwinds trading at attractive valuations. I believe I may have found just such a company with the topic of today's article, UMH Properties, Inc. (NYSE:UMH).
UMH Properties operates as a Real Estate Investment Trust in the manufactured housing industry by owning and operating 127 communities across 10 states, with the vast majority of communities residing in Pennsylvania, Ohio and Indiana.
The company, historically, has earned most of its money through site rents paid by owners of the homes choosing to reside within the company's community. The reality of the situation is that most of these homes once set in the community will never leave as the cost of moving a manufactured home once it is set is a hurdle much too large for the vast majority of home owners, making this model incredibly stable.
As you can see from the above slide, UMH currently owns and rents out roughly 35% of the homes in their communities. This transition underway towards a rental focused model is a slow one; however, the trend line is crystal clear.
Rental percentage by year:
2020 - 35%
2019 - 32%
2018 - 30%
2017 - 28%
2016 - 26%
This rental transition happening across the manufactured housing industry is not slowing down at all. In fact, this transition looks to be increasing. With the ever expanding lack of affordable housing throughout the country, this looks to be a trend set to continue for many, many years.
Source: Wolf Street
It does not take a MENSA level genius to figure out the implications of the above graph. Home prices have outpaced both rent and income growth by a very wide margin over the past half century, pushing an increasing number of Americans searching for affordable housing directly onto UMH's doorsteps.
Adding rental homes to the company's parks, either through an acquisition of a home from a current owner or by purchasing and setting them directly from a manufacturer simply makes too much economic sense to ignore.
As you can see, the rental transition at the company's communities currently underway is adding significant value to the bottom line, with much more still to come.
UMH, to its credit, has also been very disciplined in acquiring new communities with much of the current growth anticipated coming from communities it acquired at very reasonable prices in 2010-15 post financial crisis.
Recent acquisitions have likewise been purchased at below market prices and have focused on communities that can be built up and improved. I love this model as it allows for the greatest amount of value creation and the company has proven to be adept at buying underperforming "mom & pop" communities and turning them around via investment in new homes and amenities.
Some investors have bemoaned the focus of UMH being squarely in the industrial Midwest and while some of that criticism is valid due to long term demographic shifts toward the sunbelt, the housing markets in core operating areas of PA, OH & IN seem to be faring quite well lately.
The Midwest may not have the glitz and glamour of the sunbelt, but people still need places to live and the affordable home crisis is certainly not sparing the Midwest.
The nature of the business also provides attractive inflation protection as yearly lease renewals allow the company to raise rents at least in line or above the rate of inflation.
With UMH's average site rent of $466 and the average home rental rate of $800, rents certainly have meat left on the bone in the core operating markets of PA, OH & IN.
UMH is still significantly below market rent at the majority of its communities, with plenty of room left to go giving the company a solid path to sustained growth.
UMH has been making great progress for a number of years in the business and only now is beginning to get some credit from the market as its share price has recently exploded higher from the 2020 lows of $9.11 to the current, near all-time high of $23.28.
As the above graph shows both Sun & Equity continue to be valued nearly 100% higher on a cash from operations ratio. Some of this difference is certainly warranted given the relative size and balance sheet strength of the companies along with the exposure to higher end communities, RV parks and marinas that both Sun and Equity enjoy.
However, such a wide and increasing valuation gap becomes a bit questionable when all 3 companies are enjoying similar secular tailwinds in the core business of manufactured housing.
FFO valuation similarly shows quite a large gap with UMH trading at a forward 2021 P/FFO of 26.75 compared to Sun's 31.02 and Equity's 33.65.
Growth estimates going forward heavily favor UMH over Sun and Equity as well:
|Company||2021 FFO Growth||2022 FFO Growth||2023 FFO Growth||Ending P/FFO|
By 2023, if the current valuation gap holds between the three companies, UMH will be roughly 50% cheaper on a FFO basis. While I do see some valid reasons for a valuation gap to exist, 50% is simply too much in my opinion given the healthy growth rates expected at UMH.
Management's confidence is firmly back on track at UMH with the company authorizing a 5.5% dividend raise in 2021, marking the first increase since it was frozen after the financial crisis in 2009 and providing it a 3.26% current yield, outpacing Sun's 1.69% and Equity's 1.73%.
The manufactured housing industry looks set to enjoy a sustained period of outperformance given the severe and growing affordable housing shortage facing the country. In addition, the rental home transition currently sweeping the industry provides a further avenue of sustained long-term growth for the sector.
UMH looks poised to capitalize on these trends and appears to be well positioned to take advantage. Additionally, UMH is valued significantly lower than industry peers and while some of that discount is warranted, I view the company as attractively valued given the growth prospects ahead for it.
The 3.26% dividend is healthy and is now growing again, showing management's confidence in the company's market position, balance sheet and growth prospects ahead.
I view the company as a solid long-term holding and rate shares a strong buy. I have initiated a position in UMH at $23.36 with plans to add further to my position on any weakness.
Thank you for reading and good luck to all. I look forward to your comments below.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of UMH either through stock ownership, options, or other derivatives. 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.
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