(This idea was first shared with Marketplace readers of Hoya Capital Income Builder on 11/11/2021)
Apartment REITs often first come to mind when one mentions the residential real estate sector. This includes popular names such as AvalonBay Communities (AVB) and Essex Property Trust (ESS). While these are indeed high-quality names, what often gets undermentioned are manufactured housing REITs, which have provided investors with compelling returns in their own right.
Like other residential sectors, MH REITs are benefiting from the shortage of affordable housing and have seen strong performance this year, as noted by Hoya Capital in their recent research report:
Beneficiaries of the intensifying affordable housing shortage, manufactured housing REITs have been the top-performing property sector over the past decade. As discussed in our Real Estate Earnings Recap, consistent with the trends across the residential REIT industry, MH REITs significantly boosted their growth outlook last quarter, citing strong rental housing demand and substantial upwards rent pressures.
Equity LifeStyle (ELS) raised its full-year FFO outlook by 410 bps to 13.8% while also boosting its same-store NOI growth outlook to 7.9% at the midpoint. Sun Communities (SUI) somehow managed to top those impressive results by raising its full-year growth outlook by 610 bps to 24.0% and now sees double-digit NOI growth this year.
– Hoya Capital
In this article, I focus on UMH Properties (NYSE:UMH), which is much smaller than the aforementioned ELS and SUI REITs. What UMH lacks in size, however, it makes up for with respectable growth and valuation. I highlight what makes UMH a worthy Buy for growth and income, so let’s get started.
3 Reasons UMH Is A Cash Cow You Can Buy Today
UMH Properties is a growing manufactured housing REIT that’s been around since 1968 (since 1985 as a public company). At present, it has 127 communities containing approximately 24K developed home sites, an increase of 3 communities totaling 500 sites from a year ago.
UMH’s locations are primarily clustered around Pennsylvania and Ohio, near the energy producing regions of the Marcellus and Utica shale formations, home to one of the largest sources of natural gas in the world. This results in efficient scale, as having properties clustered together makes them easier to manage.
(Source: Investor Presentation)
Notably, UMH invests in other REITs through its securities portfolio, which is valued at $103M, comprising 6.8% of its undepreciated assets. The portfolio consists of Industrial (48% of portfolio), Retail, (36%), Office (15%) and Healthcare (1%). This does add a bit of complexity risk, and the value of the portfolio has declined since peaking in 2017.
However, as seen below, it appears the valuation has stabilized since the pandemic-related decline last year, and industrial and retail REITs appears to be well positioned for the continued economic recovery.
(Source: Investor Presentation)
One of the reasons for why UMH properties is attractive is that manufactured housing properties tend to have sticky tenant relationships, especially with units owned by the tenant. That’s because tenants tend to have significant equity skin in the game, which makes it more likely that they will pay rent on the underlying land lease on their units.
In addition, unlike for apartment REITs, there are more supply constraints on MH housing, as most cities and counties have strict zoning requirements around MH sites, resulting in favorable supply and demand characteristics for existing operators.
Secondly, UMH is performing well in the current operating environment due to the shortage of affordable housing, as noted earlier. This is reflected by UMH firing on all cylinders in the third quarter, with rental income growing by an impressive 11% YoY, and with sales of manufactured homes growing by 15% YoY.
It appears that cost inflation is not an issue for UMH, as rental revenue growth outpaced cost growth. This is reflected by the operating expense ratio declining by 290 bps YOY, to 41.8%. This helped to drive same property NOI growth of 15% YoY, and I’m also encouraged to see that rental home occupancy improved by 50 bps YoY, to 95.1%. As seen below, total and same-property occupancy also continues to grow.
(Source: Investor Presentation)
Thirdly, UMH is well-positioned for growth with a sizeable “land bank” consisting of 3,300 vacant lots to fill, and nearly 1,800 vacant acres on which to build approximately 7,300 future lots. Management continues to see robust demand and noted that its biggest concern is the availability and pricing of its inventory. The CEO also noted on the expansion in Florida in the recent conference call:
We have decided that now is the time to build or buy new communities from developers. We have entered into contracts to purchase three to be built communities in Florida. These communities will contain a total of 804 developed sites for a total purchase price of approximately $89.9 million.
Construction of the first community is expected to be complete in the first quarter of 2022. This community will contain 219 sites and has a purchase price of approximately $23 million or $105,000 per site. The communities will be highly amenitized with clubhouses pool, bocce ball pickable, splash pools, dog parks and more. We are working on additional development deals and anticipate growing our pipeline soon.
To help fund these acquisitions and negate the short-term impact development deals have on FFO we are negotiating a joint venture with an institutional investor. A joint venture will allow us to do a higher volume of development deals. We have built an irreplaceable platform that is delivered exceptional results time and time again.
– CEO Samuel Landy
Meanwhile, UMH has improved its balance sheet and has $82.4M in cash on hand, plus an additional $50M in availability on its credit facility and another $50M potentially available pursuant to an accordion feature. It’s also worth noting that UMH has the $103M aforementioned securities portfolio that is currently unencumbered. UMH also maintains a solid interest coverage ratio of 4.2x and a low net debt to adjusted EBITDA ratio of 4.8x, as seen below.
(Source: Investor Presentation)
This lends support to the 3.2% dividend yield with a payout ratio of 86%. Management also appears set to resume dividend growth with the $0.01 increase to the quarterly payout to $0.19 per share earlier this year.
I see value in UMH at the current price of $23.32, with a forward P/FFO of 26.5. While this isn’t cheap on the surface, it’s worth noting that analysts expect double-digit annual FFO/share growth over the next two years in the mid- to high-teens. Seeking Alpha’s Quant has a Bullish rating on the stock, and sell side analysts have a Strong Buy rating, with an average price target of $28.50, implying a potential 25% one-year total return.
(Source: Seeking Alpha)
UMH does come with more concentration risk to energy producing regions than its peers, but I see the valuation gap as making up for it. As seen below, UMH’s EV/EBITDA of 26x sits at a meaningful discount to the 29x and 33x of peers SUI and ELS, respectively.
(Source: Seeking Alpha)
Investor Takeaway
UMH Properties is benefiting from favorable supply and demands in the affordable housing space, and is well positioned for growth with its sizeable land bank. Meanwhile, its portfolio is hitting on all cylinders with revenue and margin growth. Meanwhile, UMH maintains a strong balance sheet and pays a covered and growing dividend. I see value in UMH at present for long-term income and growth.
Gen Alpha Teams Up With Income Builder
Gen Alpha has teamed up with Hoya Capital to launch the premier income-focused investing service on Seeking Alpha. Members receive complete early access to our articles along with exclusive income-focused model portfolios and a comprehensive suite of tools and models to help build sustainable portfolio income targeting premium dividend yields of up to 10%.
Whether your focus is High Yield or Dividend Growth, we’ve got you covered with actionable investment research focusing on real income-producing asset classes that offer potential diversification, monthly income, capital appreciation, and inflation hedging. Start A Free 2-Week Trial Today!